Retirement plans are simply formal contracts to provide retirement benefits. Some plans you can set up by yourself. Others plans may be sponsored by your employer.

This is a retirement plan that is certified by the "Internal Revenue Code Section 401(a)" and the "Employee Retirement Income Security Act of 1974 (ERISA)" therefore it is entitled for advantageous tax treatment, permitting employers to subtract yearly permissible contributions for every participating employee and earnings on said contributions are "tax-deferred" until taken out for every participant; some taxes may even be deferred further by means of transferring into another different kind of IRA.

While not legally obligated to do so, employers may establish retirement plans to attract prospective employees and to keep current employees. Employers have an incentive to set up "qualified" plans because they get tax benefits in the process.

Two main categories of "Qualified retirement plans:

1. "Defined benefit plans" are "company retirement" plans, like pension plans, where when an employee reaches retirement, he will receive a specified amount that is usually based on his salary and number of years in the service, whereby his employer carry the risk in investment. The employee alone, or both employer and employee, can contribute.

2. "Defined contribution plan" This type of plan outlines the amount that flows to employees on how much should be contributed by an employer each year to the retirement plan. This kind of plan keeps account balances of all participants and dictates that no participant can receive an allotment of beyond the "lesser of 25 percent" of compensation or 30,000 dollars throughout any year.

Examples of "Qualified" Retirement Plans

Popular "qualified" defined contribution plans include:

IRA - The simplest qualified retirement plan is an individual retirement account (IRA). An IRA is essentially a contract with yourself to keep money in a tax-qualified account until retirement. One benefit of an IRA is that taxes are deferred contributions and the subsequent earnings until they are withdraw.

401(k) Plans - A 401(k) plan is a type of deferred compensation plan. You may annually contribute roughly $15,500 of your earnings for those age 49 and below and $20,500 for those age 50 and above. Your employer may match a percentage of what you contribute. You are not taxed on contributions until you receive distributions. There can be stiff penalties for withdrawals before age of 59-1/2. A great incentive to participate is that contributions can grow and accumulate until withdrawal, all on a pre-tax basis.

Profit Sharing Plans - A profit sharing plan allows an employer to supplement other retirement benefits by letting employees share in profits. Contributions are at the discretion of the employer. If contributions are made, however, they must be on a non-discriminatory basis. Usually, an employer makes contributions based on a percentage of total annual pay roll.

Popular "qualified" defined benefits plans include:

Pension Plans - Provide retirement benefits where the employer promises retirees a pension in a specific amount, with the benefit set by a formula based on years of service X final average salary X a percentage figure.

The employer must contribute to the plan on a regular basis so that sufficient funds are available to pay required benefits to all retired employees as they come due. The employer bears the risk of having sufficient funds to pay the pensions.