Defined Contribution Plan

What is a Defined Contribution Plan?

 

A defined-contribution plan is a type of retirement plan in which an employee or an employer contributes to an employee’s retirement account. The final retirement plan depends on the contributions, the investments made with those contributions, and any expenses.

 

Is a 401(k) a Contribution Plan?

 

A 401(k) is an outstanding defined-contribution plan (DCP) example. In a 401k plan, both the employer and employee contribute to the plan, and these contributions are invested in different financial sectors, such as mutual funds, stocks, and bonds.

 

The retirement plan offered by a 401(k) is not predetermined but depends on various factors, such as contributions made, investment performance, fees, and expenses.

 

In the United States, a 401(k) plan can be a vital retirement-saving tool. It offers tax benefits that encourage people to save. Contributions are deducted from the employee’s taxable income. Investment gains in the account are only taxed if withdrawals are taken during retirement.

 

What is a Defined Contribution Retirement Plan?

 

A Defined-Contribution Retirement Plan (DCRP) is a plan in which the employee and employer make regular and equal contributions to a personal account. The retirement benefit is determined by the contributions and investment performance.

 

The most common example of a defined-contribution plan is a 401(k) plan involving Individual Retirement Accounts (IRAS) that are valid in the U.S. This type of plan allows the individual to save money for retirement and offers tax benefits to increase long-term savings.

 

Also, See: Non-Qualified Deferred Compensation (NQDC)