The "defined contribution" means a certain percentage of either a self-employed or an employee's earnings are contributed to the defined contribution plan. The future retirement pension benefit is not fixed as in a defined benefit plan.The future retirement benefit will depend upon the amount of contributions, years of service, investment performance, etc. -- the future monthly retirement check is therefore not guaranteed.
Money Purchase Plan
A Money Purchase Plan requires that the yearly contribution be a fixed percentage of either the self-employed or employee's earnings. The contribution percentage can be as much as 25% but the dollar amount cannot exceed $49,000 ($54,500 if age 50) in 2009. The 2010 limits have now been released and they are the same as 2009 because the cost-of-living index has not increased. The big drawback of a Money Purchase Plan is that the selected contribution percentage is fixed and does not depend upon the current year's business profit or loss.
The Money Purchase Plan can also include a 401k salary deferral feature. A better selection for your small business may be a Profit Sharing Plan.
The big advantage of a Profit Sharing Plan is that the contribution amount is not fixed and can vary from year to year. This contrasts with the Money Purchase Plan where you are required by the Plan to make a fixed yearly contribution amount.
The Profit Sharing plan can also have a 401k salary deferral feature.
If you are self-employed, you must use a special calculation to compute your own retirement contribution to the above plans.
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Defined Contribution Retirement Plan
Profit Sharing Plan Contribution Limits
Defined Contribution Pension Plan
A defined contribution plan is a qualified retirement plan that must meet certain IRS tax laws.
The two types of defined contribution plans are a Money Purchase Plan and a
Profit Sharing Plan. Your small business can be either a sole proprietorship, corporation or a partnership. These plans were all once called Keogh Plans, named for U.S. Congressman Eugene Keogh who sponsored the legislation, Law HR-10.
The IRS rules also allow you to do a tax-free profit sharing rollover or a money purchase rollover to your IRA or to another retirement plan.
Profit Sharing Plan
The name "Profit Sharing Plan" does not imply that your small business corporation must have profits in order to make a yearly contribution to the plan. However, if you are self-employed, you must have profits to be eligible for a contribution for yourself.
You can contribute up to 25% of your salary or your self-employed earnings; and the same for each of your employees. The maximum amounts are the same as the above Money Purchase limits.
