DEFINED CONTRIBUTION PLAN
With a defined contribution plan, only the amount of money that is deposited into the account is known, such as 6 percent of the employee's salary. Both the employee and the employer may contribute a percentage of the employee's earnings into the plan. The money is allowed to grow tax-deferred until the participant withdraws it at retirement. The ultimate benefit under a defined contribution plan is the result of the contributions into the plan as well as the investment results of the plan. The employee's maximum contribution to a defined contribution plan is $16,500 per year. Some types of defined contribution plans are:
• Money purchase plan
• Profit sharing
• Thrift plans
• Stock bonus plans
All withdrawals from pension plans are taxed as ordinary income in the year in which the distribution is made.
EMPLOYEE STOCK OWNERSHIP PLANS/ESOP
ESOP plans are established by employers to provide a way for the employees to benefit from ownership of the company's stock. The plan allows the employer to take a tax deduction based on the market value of the stock.
PROFIT SHARING PLANS
Profit sharing plans let the employer reward the employees by letting them "share" in a percentage of the corporation's profits. Profit sharing plans are based on a preset formula and the money may be paid directly to the employee or placed in a retirement account. In order for a profit sharing plan to be qualified, the corporation must have substantial and recurring profits. The maximum contribution to a profit sharing plan is the lesser of 25 percent of the employee's compensation or $52,000.
(K) THRIFT PLANS
401(k) and thrift plans allow the employee to contribute a fixed percentage of their salary to their retirement account, and have the employer match some or all of their contributions. The employer's contributions provide a current tax deduction to the employer and the employee is not taxed on the contributions until they are withdrawn.