If you don’t already know about QRPs or Qualified Retirement Plans in a nutshell it’s your employer’s way of assisting with your retirement. With this plan you gain tax breaks for moving money from your paycheck into retirement. Many employers use a company match where the company will match your contribution if you contribute a certain percentage. For example, if your employer matches your contribution if you contribute 3% of your income. Other employers participate in matching as well as 100% vesting.
Vesting means as you leave the company you can take the money you contributed to your Qualified Retirement Plan as well as the money the company matched, if any. Vesting can be immediate or it may take years for you to fully vest or take your money and matched money upon leaving the company. I worked for a Financial Services company that allowed 100% vesting. When I was laid off, I was able to take my money and the companies matched money and roll it over into a Non-Qualified Retirement Account. Vesting entices employers to stay with the company during the vesting period. Without full vesting, you may take all of your contribution and a portion, if any, of matched money.
Here is a high level list of U.S. Retirement Plans:
Defined Benefit Plan (QRP)
Target Benefit Plan (QRP)
Defined Contribution Plan (QRP)
Profit-Sharing Plan (QRP)
Money-Purchase Pension Plan (QRP)
Stock Bonus Plan (QRP)
401(k) Plan (QRP)
Tax Sheltered Annuity (TSA)
Converted Roth IRA
Keogh Plan (QRP)
QRP = Qualified Retirement Plan
Why are some retirement plans qualified? Qualified means the employer offering the plan will gain a tax break for their contribution. And money automatically deducted from your pay into your 401k is pre-tax dollars. This pre-tax contribution is a benefit to you as the employee because you may use your contribution as a tax deduction.
If you work for XYZ Company and you have a 401k plan (I use 401k because it’s very common at companies) and you decide to quit (this includes layoffs and firing) you can move that 401k to your new company or into a non-qualified retirement plan such as a Roth IRA.
Non-Qualified Retirement Plans are everywhere and they can be as close as your local bank branch. The key in finding a good one is research. The top finance magazines make suggestions as well and your financial planner, Certified Public Accountant (CPA), bookkeeper and next door neighbor. I would imagine if your dog could talk they would weight in their top picks as well. You don’t have to Ben Bernanake, the former Federal Reserve Chairman, to be a good retirement investor.
Now if you are investing in a non-qualified retirement account such as a Traditional IRA or Roth IRA, the 2014 maximum the Internal Revenue Service will let you contribute is $5,500 per year or $6,500 if you’re over 50 or over. Self-employed business owner can use a SEP-IRA and the contribution 2014 limits are 25% of compensation or $52,000 and subject to annual cost-of-living adjustments for later years.
Tips to remember:
- Find out what type of retirement plan you have Qualified or Non-Qualified
- Does your company match your contribution and at what percentage?
- What is the vesting at your company? How long does it take to vest to 100%
- Research Traditional and Roth IRAs.
I will go into more detail in the next post.
Talk to you soon,