What is a Defined Contribution Plan?
A Defined Contribution Plan (DCP) is a kind of retirement plan where an employee or employer contributes money into an employee’s account for retirement; in a defined contribution plan, the final retirement plan depends upon the contributions made towards the plan, the investment contributions via those contributions and any associated expenses.
Is a 401k a Defined Contribution Plan?
A 401k is an outstanding example of a Defined Contribution Plan (DCP). In a 401k plan, both the employer and employee contribute towards the plan, and these contributions are invested in different financial sectors like mutual funds, stocks and bonds.
The eventual retirement benefit plan in a 401k plan is not predisposed but depends on factors like contributions made, investment performance, associated fees or expenses.
A 401k plan is a crucial retirement saving method in the U.S. as it offers tax advantages encouraging individuals to save. The contributions made by the employees are deducted from their taxable income, and investment gains within the account are to be taxed only if the withdrawals are made during retirement.
What is a Defined Contribution Retirement Plan?
A Defined Contribution Retirement Plan is a kind of retirement arrangement in which both the employer and an employee make equal and regular contributions to an individual account, and the eventual retirement benefit is resolved by the total contributions made and the investment performances towards those plans are “specified”, but the final retirement benefit is not determined and varies based upon investment choices made.
Most common examples of a Defined Contribution Retirement Plan include 401k plans involving Individual Retirement Accounts (IRAs), which are valid in the U.S. and some other countries. This kind of plan provides the individual with a vehicle to save for his/her retirement plan, also offering tax advantages to boost long-term savings.
Also, See: Non-Qualified Deferred Compensation (NQDC)