Updated: Nov 17, 2020
If you recently launched a business, you may want to set up a tax-favored retirement plan for yourself and your employees. There are several types of qualified plans that are eligible for these tax advantages:
A current deduction from income to the employer for contributions to the plan,
Tax-free buildup of the value of plan investments, and
The deferral of income (augmented by investment earnings) to employees until funds are distributed.
There are two basic types of plans.
Defined benefit pension plans
A defined benefit plan provides for a fixed benefit in retirement, based generally upon years of service and compensation. While defined benefit plans generally pay benefits in the form of an annuity (for example, over the life of the participant, or joint lives of the participant and his or her spouse), some defined benefit plans provide for a lump sum payment of benefits. In certain “cash balance plans,” the benefit is typically paid and expressed as a cash lump sum.