Financial independence may seem like a pie in the sky ideal, but you can achieve it with appropriate personal retirement planning.

Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. We are not going to talk about Social Security here because it is actually a social insurance and not a retirement plan.

A retirement plan is one of the most important and meaningful benefits the employer can offer to the employees, and they are advantageous for business owners and employees as well, mostly for tax reasons. They are deferred savings tools that allow the tax-free accumulation of a fund for later use as a retirement income.

QRP’s are certified by the “Internal Revenue Code Section 401(a)” and the “Employee Retirement Income Security Act of 1974 (ERISA)”.

According to how the benefits are determined, retirement plans are classified as defined benefit plans and defined contribution plans.

With a Defined-benefit plan, your benefits on retirement are predetermined, following a set formula that can include your pay, years of employment, age at retirement and other factors. These plans are also known as company retirement plans.

Defined benefit plans can be funded or unfunded. In a funded defined benefit plan, contributions from the employer and plan members are invested in a fund. Depending on future returns on the investments and the future benefits to be paid, contributions may be regularly reviewed to ensure that the pension fund will meet future payment obligations.

In an unfunded defined benefit plan, the benefits are paid for by the employer out of the employees contributions. The Social Security system is similar to this kind of plans.

In a Defined-contribution plan, you, as well as your employer, may contribute to the plan. The contributions, which are paid into your individual account, are invested and the returns on the investment are deposited to your account. So practically, with a defined contribution plan your retirement benefits are based solely on the amount contributed to the account, with the income, gains, losses and expenses allocated to your account.

Types of defined contribution plans include:

• Profit Sharing Plans
  

There are many types of QRP’s indeed, as each different plan is designed to accomplish different employer’s and/or employee’s objectives. We intend to explain more about the most important QRP’s in our future newsletters.

Some of your benefits as an employee to participating in a QRP are that:

There are, of course, advantages for the employer:

• The employer may receive a tax deduction for plan contributions.