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Simple English definitions for legal terms
defined contribution plan
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A quick definition of defined contribution plan:
A defined contribution plan is a type of retirement plan where an employee and sometimes their employer put money into an account that is invested. When the employee retires, they receive payments from the account based on how well the investments did. This type of plan has benefits like not paying taxes on gains until retirement, but the employee usually can't take money out until they're 59 ½ years old without paying a fine. This is different from a pension plan where the employer guarantees a specific amount of money to the employee regularly. 401(k)s are a common type of defined contribution plan.
A more thorough explanation:
A defined contribution plan is a type of retirement plan where both the employee and sometimes the employer contribute to a retirement account. The money is then invested, and the employee will receive payments upon retirement that depend on how well the investment performs. This is different from a pension plan where the employer guarantees a specific amount of money to the employee periodically.
One popular example of a defined contribution plan is a 401(k). In a 401(k), the employee contributes a portion of their salary to the retirement account, and the employer may also contribute a matching amount. The money is then invested in stocks, bonds, or other investments. When the employee retires, they receive payments based on how well the investments performed.
Defined contribution plans have many benefits, including tax advantages and flexibility. The contributions are not taxed until the money is withdrawn at retirement, and the employee can choose how to invest the money. However, there are also some restrictions, such as penalties for withdrawing money before a certain age.
Overall, defined contribution plans are a way for employees to save for retirement and potentially earn more money through investments.