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What are the basic differences between retirement account options?
Retirement accounts can be categorized in a number of different ways, but for the sake of easy comparison, we have broken down the different plans into two categories.
Defined Benefit plans are group plans offered by employers, and they
- are funded solely by the employer,
- guarantee a predetermined benefit at retirement,
- shift the investment risk to the employer, and
- are covered by insurance should the company fold.
Defined Contribution plans can be sponsored by an employer, or set up by an individual.
- Depending on the type of plan, they can be funded by either the employer, the individual, or by both.
- They do not offer a guaranteed benefit, some may not even offer a guaranteed contribution.
- The investment risk rests on the individual.
- Contribution limits are calculated based on income and type of account. Employer-sponsored plans will allow you to save more than an IRA.
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