U.S Retirement Plans

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US Retirement Plans

A retirement plan can be defined as a financial arrangement that is designed to replace one's employment income when the he or she stops working (Friedberg and Webb 282).The retirement plan can be set up or arranged by employers, trade unions, insurance companies, the government, and other institutions that are concerned with employee's welfare. The congress has continued to encourage people to practice responsible retirement planning through favorable tax treatment to the various retirement plans. In the U.S, the Internal Revenue Service (IRS) code defines retirement plans in tax terms. Provisions of the Department of Labor regulate the retirement plans (Poterba et al 2065).

The idea behind a retirement plan is to save when one is working so that upon retirement, the person will continue to receive ample income. The idea is executed and accomplished when an employee sets aside funds in the working period and the funds plus the earnings from the invested funds replace his or her wages after retirement (Poterba et al 2068).

Employers get tax deductions for the amounts that they pay into the pension funds. The qualifications and requirements for a qualified plan include covering at least 70% of the workforce, indiscrimination on salary level basis, vesting of benefits after a certain period of service, and must comply with specific restrictions relating to the amount and timing of benefits and contributions (Topa et al 50).

In the U.S, there are two types or categories of pension plans: defined benefit plan and defined contribution plan. The defined benefit plan guarantees retirement benefits that are predetermined. A pre-selected formula is used to determine the retirement benefits (Friedberg and Webb 300).For example, there can be a specific monthly benefit that the employee receives on retirement.