Money Purchase Pension Plan
What Is a Money Purchase Pension Plan?
A money purchase pension plan is an employee retirement benefit plan that looks like a corporate profit-sharing program. It requires the employer to deposit a set percentage of the participating employee's salary in the account consistently. The employee isn't permitted to add to the fund yet may pick how to invest the money in view of options offered by the employer.
In a money purchase pension plan, the employee's account balance is tax-deferred until the money is removed, while the employer's contribution is tax-deductible. It is like a profit-sharing plan, yet the rules for a money purchase plan are more inflexible in light of the fact that the company can't change its contribution level as profits go up or down.
Understanding the Money Purchase Pension Plan
A money purchase pension plan is a qualified retirement plan. That means it's eligible for tax benefits and subject to tax regulations. The rules are like those for any qualified retirement account:
- In the event that you leave your employer, you can roll the money over into a 401(k) or an IRA
- You can't pull out the money before retirement without paying a penalty
- Your employer might approve loans however not withdrawals from the account
The money purchase pension plan is intended to give retirement income. Upon retirement, the total pool of capital in the account can be utilized to purchase a lifetime annuity or can be removed in lump sums.
A money purchase pension plan might be a strong expansion to an employee's retirement savings, particularly in the event that it's an expansion to different savings plans, for example, a 401(k).
The amount in every money-purchase plan part's account varies, contingent upon the employee's level of contributions and the investment return earned on those contributions. Money purchase plans can be utilized notwithstanding profit-sharing plans to expand annual savings levels. The plan might be utilized along with other retirement plans too.
Company contributions must be made whether the business creates a gain, or how much profit it makes. For 2020, the overall contribution limits permitted by the IRS are the lesser of 25% of an employee's compensation or $57,000; for 2021, the limit is $58,000.
The member's benefit at retirement depends on total contributions and the gains or losses on investments. However long the contribution amounts stay inside the annual limits, the money is tax-deferred. Employers regularly lay out a vesting period after which an employee is eligible for the program. Subsequent to being completely vested, an employee might begin taking out funds at age 59\u00bd without a tax penalty.
Withdrawals, whether as a lump sum or in installment payments, are taxed as ordinary income and must start when the account owner arrives at age 72. Prior to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in Dec. 2019, the age for required least distributions was 70\u00bd. In this way, for anybody turning 70\u00bd on Jan. 1, 2020 or later, they can hold on until the age of 72 before beginning required distributions from 401(k)s and different types of qualified retirement plans.
Advantages and Disadvantages
The money purchase pension plan can substantially help retirement savings, particularly on the off chance that utilized related to different savings plans like a 401(k). For the company, having such a program gives them an edge in vieing for ability. The tax benefit pads any blow from the expenditure. On the downside, the money-purchase pension plan might have greater administrative costs than other retirement plans.
Features
- This is a "qualified" retirement savings plan, meaning the employee doesn't pay taxes on the money until it is removed.
- Employees don't add to their pension plan, however they might have 401(k) plans also.
- The money purchase pension plan is an annual employer contribution to its employees' retirement savings.
