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Pension Planning

A qualified plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to its employees over a period of years, usually for life, after retirement. It may provide incidental death benefits, through life insurance or otherwise, and disability pensions. The requirement that the benefits be definitely determinable may be met by providing for either fixed benefits of fixed contributions. The size of an employee’s pension is usually related to his compensation, years of service, or both.

Defined Benefit Plan

A plan that provides fixed benefits, the size of the pension, or a formula to determine size, is set in advance, the annual contributions are determined which will gradually accumulate a fund sufficient to provide each employee’s pension when he retires. An example of this is the 412(i) defined benefit plan.

Defined Contribution Plan (Money Purchase Plan)

Under a plan that provides for fixed contributions, the annual contribution to an employee’s account is fixed or definitely determinable, and the employee receives whatever size retirement benefit can be purchased with the funds accumulated in his account.


A plan for sharing employer profits with the employees. A profit-sharing plan need not provide a definite, predetermined formula for determining the amount of profits to be shared. An example of profit-sharing plan is the 401K.

Regular Individual Retirement Account (IRA)

A retirement account that allows individuals to make tax-deferred contributions to a personal retirement fund. You can place IRA funds in bank accounts or in other forms of investment such as annuities, stocks, bonds, or mutual funds. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and coverage by an employer-sponsored retirement plan.

Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA)

A retirement plan that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to the SIMPLE. The employer makes either matching or non-elective contributions to each eligible employee’s SIMPLE IRA and employees may make salary deferral contributions.

Simplified Employee Pension Individual Retirement Account (SEP IRA)

A tax-deferred retirement plan for small businesses with fewer than 25 employees and the self-employed. A type of retirement plan that an employer can establish, including self-employed individuals. The employer is allowed a tax deduction for contributions made to the SEP Plan. The employer makes contributions to each eligible employee’s SEP IRA on a discretionary basis.

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