As long as we are discussing life insurance and what the long and/or short term benefits are, let's take a look at retirement plans. As you've learned, some life insurance policies can be included in your discussions of retirement options.

Each retirement plan is different and each is designed to cater to different employer goals and employee needs.

Qualified retirement plan

This is a retirement plan that is certified by the " Internal Revenue Code Section 401(a)" and the "Employee Retirement Income Security Act of 1974 (ERISA)" therefore it is entitled for advantageous tax treatment, permitting employers to subtract yearly permissible contributions for every participating employee and earnings on said contributions are "tax-deferred" until taken out for every participant; some taxes may even be deferred further by means of transferring into another different kind of IRA.

For employers, subsidizing a "qualified retirement plan" can:

• Draw experienced employees into their company.
• Motivate and retain good employees.
• Help employees set aside financial aid for future use or for retirement because the benefits of the Social Security alone are not enough to support a sensible way of living for retirees.
• Protect plan assets from creditors.

Two main categories of "Qualified retirement plans"

1. "Defined benefit plans" are "company retirement" plans, like pension plans, where when an employee reaches retirement, he will receive a specified amount that is usually based on his salary and number of years in the service, whereby his employer carry the risk in investment. The employee alone, or both employer and employee, can contribute.
2. "Defined contribution plan". This type of plan outlines the amount that flows to employees on how much should be contributed by an employer each year to the retirement plan. This kind of plan keeps account balances of all participants and dictates that no participant can receive an allotment of beyond the "lesser of 25 percent" of compensation or 30,000 dollars throughout any year.

Principal "defined contribution plan" types:

• "Profit sharing plans". Accumulate funds by way of employer contributions in an individual account for every eligible employee. Every participating employee's share of his employer's contribution generally is based on his compensation level. These plans let employers establish, within clear and specified limits, the amount to be provided or contributed annually.
• "Money purchase plans". Similar to "profit sharing plan", however the contribution rate is a "fixed percentage" for every year, like for instance 15 percent of every eligible employee's salary.
• "Target benefit plans". This is an adaptation a "money purchase plan" but instead of beginning with a "fixed percentage" for every employee, it specifies a particular benefit, like 50 percent of compensation at retirement; it also bases contribution of employees on the funds needed to fulfill that obligation.

Contribution for older employees will generally be a lot higher compared to the contribution of younger employees for the same amount, because older employees have a shorter duration to build up the essential funds. Here, the real "retirement benefit" is not assured but will largely depend on investment earnings.

• "401(k) Plans." These plans permit employees to state the "pre-tax" income amount that must be subtracted from the salary of the employee and deposited into their retirement account. Employees are given the right to establish the level contribution that will suit their individual financial situation best.
• "Stock bonus plans and employee stock ownership plans". ESOP's are meant to utilize company stock for accumulating equity as a retirement resource or supply for company employees.
• "Simplified employee pension". SEPs function similar to "profit sharing plan" or "money purchase plan" whereby the employer sets an amount to contribute into every employee's account every year. However the contribution is not deposited to a retirement trust but is converted into IRA so that the employee has jurisdiction over the funds in his IRA.
• 403(b). This is a "tax-deferred retirement plan" for specified tax-exempt employers like public schools, "non-profit organizations" and some hospitals. Contributions may grow "tax-deferred" until it is withdrawn then it is taxed like an ordinary income.

Non-qualified retirement plan

This type of retirement plan do not meet requirements set by "Internal Revenue Code Section 401(a)" and the "Employee Retirement Income Security Act of 1974 (ERISA)". These plans are financed by employers therefore are flexible compared to "qualified retirement plans" however do not include tax benefits that "qualified retirement plans" offer. Benefits, structured in annuities form, are paid generally at retirement age and are "taxed" just like "ordinary income tax"; or in "lump sum" or one single payment that may be transferred or changed into IRA so to suspend or defer taxes.

"Top-Hat plans" (THP), "Excess benefit plans" (EBP) and "Supplemental executive retirement plans" (SERP) are types of non-qualified and deferred compensation plans patterned to complement or enhance "qualified retirement plans".

"Non-qualified retirement plan" accomplish to supplement "qualified retirement plans" by compensating the benefits that are unavailable to qualified plans and typically covers highest company paid employees. It may be non-funded or funded. The main drawback with this plan is that actually nothing is promised to the employees should the company goes into bankruptcy, or is sold to another company.

You must always know your options and should develop an opportunity strategy way before your retirement. Pursuing professional investment advice will help you manage and synchronize your options with a complete estate and financial plan.

Next page: Life Insurance and Taxes

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