Traditionally employer-provided pensions have been defined benefit plans in which the employer promises a benefit based on a formula that considers the employee’s years of service and salary. “However, these traditional pensions are becoming less common. Instead employers are offering defined contribution plans, “adds Schmitt.
The amount of money in your defined contribution account at retirement will depend on your investment choices and the returns these have made over the years. Examples of defined-contribution plans include 401(k) plans, 403(b) plans, and 457 plans, all of which share similar characteristics.
Defined contribution plans are tax deferred plans. Employee contributions to the plans are pre-tax contributions. You save on your tax bill and invest for retirement at the same time. The earnings on the growth on your investments in the plan are not taxed until you withdraw money in your retirement.
There is a maximum contribution allowed by law which tends to change each year. Some plans automatically enroll employees in the plan and deduct part of the employee’s salary into the plan unless an employee opts out. The company may match your contribution in whole or in part. For example, an employer may add 50 cents for every dollar you contribute up to a maximum amount. “It is a good strategy to take advantage of this employer match,” Schmitt says.
A defined contribution plan gives the employee choices as to how the money is invested. These typically are mutual funds including stock, bond and money market funds. It is important to consider your risk tolerance, your return needs, and time horizon when making your selections.
Beginning in January, an 8 week series of online classes will be available through Iowa State University Extension and Outreach. For more information on specific topics and registration information, contact your local ISU Extension and Outreach office and ask about the RETIREMENT: Secure Your Dreams program information. Or contact Brenda Schmitt at 641-512-0650 or schmitt@iastate.edu.