Information from Consumer
Education & Economics book
Education & Economics book
Retirement
A defined-benefit plan is not very common. When a company does this, it makes it's employees stay with them until they retire. Then, during retirement, the company will send you a certain amount of money each month. No matter what the company has to keep paying you, that's why a defined-benefit plan isn't very common anymore.
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A defined-contribution plan is different. This one relies more on the employee. Employees decide how much money to invest in a retirement fund. When you retire, you get the money you put in the retirement fund. So the amount of money depends on how much you put in.
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A 401(k) plan is also very common. An employee will set aside a certain amount of money for retirement, and the employer will usually match to a certain percent. The money goes straight to a retirement fund. Most employers won't allow you to touch that money until a certain age. If you take money out earlier than they tell you then there are consequences. If you leave the company, the money will get transferred to the new retirement plan.
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An ESOP(Employee Stock Ownership Plan) is my last type. Employees get shares in the company's stocks instead of profits. But, the employee won't be able to sell them until a certain number of years. Unless they leave or retire first. It is not good to depend on ESOP as your only income for retirement because of the lack of diversification.
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A Roth IRA is an account where the money goes in after tax. But, withdrawals are tax-free. You have to wait a few years until you can get the money from the account penalty-free.
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A Traditional IRA doesn't include tax until you make withdrawals during retirement. When you retire you have a lower income so you won't get taxed as highly. Annual contributions to this IRA can only happen until you are 70 1/2.
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