Question

What are the two major types of qualified retirement plans? What is the main difference between them? Which one does a 401K plan fall under?

Answer 1

Different Types of Retirement Accounts

• Traditional Individual Retirement Arrangements (IRAs) ...
• Roth IRAs. ...
• 401(k) Plans. ...
• SIMPLE IRA Plans (Savings Incentive Match Plans for Employees) ...
• SEP Plans (Simplified Employee Pension) ...
• Payroll Deduction IRAs. ...
• Defined Benefit Plans. ...
• Employee Stock Ownership Plans (ESOPs)

401(k) vs. Pension Plan:

A 401(k) and pension are both employer-sponsored retirement plans. The biggest difference between the two is that a 401(k) is a defined-contribution plan and a pension is a defined-benefit plan.

A defined-contribution plan allows employees and employers (if they choose) to contribute and invest funds to save for retirement, while a a defined-benefit plan provides a specified payment amount in retirement. These crucial differences determine whether the employer or employee bears the investment risks. Pensions have become less common, and 401(k)s have had to pick up the slack, despite being designed as a supplement to traditional pensions rather than as a replacement.

• A 401(k) is a retirement plan that employees can contribute to and employers may also make matching contributions.
• With a pension plan, employers fund and guarantee a specific retirement benefit for each employee and take on the risk for doing do.

Which one does a 401K plan fall under

A 401(k) plan is a company-sponsored retirement account that employees can contribute to. Employers may also make matching contributions.There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they're taxed.

In a traditional 401(k), employee contributions reduce their income taxes for the year they are made, but their withdrawals are taxed. With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free.