How to Open a Retirement Account with Your Employer

Daniel Penzing
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Company Retirement Plan

Employee. generally, plans need to be opened and funded by members only so that contributions are tax deductible.

There are two main types of plans: defined benefit plans and defined contribution plans. Decrease employees –irregular income — will benefit more from defined contribution plans because they are afforded a greater level of flexibility and control, and they may not see the long-term consequences of their investment choices.

Defined benefit plans allow increased portability, but do not allow the types of diversifying portfolios that defined contribution plans encourage.

Non-Employer Sponsored Retirement Plans

The first form of retirement plan you will probably encounter at work is what’s commonly called a 401(k), or a non-employer sponsored retirement plan at work.

Non-employer sponsored retirement plans at work and employer sponsored retirement plans at work have a lot of similarities because they have many of the same tax rules, but there are some important differences.

The entry requirements can vary and sometimes it seems like your work retirement plan isn’t the same as a traditional Qualified Retirement Plan.

Employer sponsored retirement plans at work aren’t just for employees.

The employer’s role in non-employer sponsored retirement plans at work is limited to providing space for employees to contribute their own money to the plan.

Employees can choose to invest money in a non-employer sponsored retirement plan at work with their own money in it with no company contribution.

In that case, they are taking all of the investment risk.

The employer isn’t obligated to make contributions, so you can’t be sure what kind of employer sponsored retirement plans at work you may have.

Non-employer sponsored retirement plans at work are designed to meet the academic standards set by the Internal Revenue Service.

Non-Retirement Investment Accounts

Employee Stock Purchase Plan

Employee Stock Purchase Plan (ESPP) is a program set up by an individual company, entitling the employees to buy company stock at a discount. Basically, you are offered an opportunity to purchase stock in the company you work for for a discount.

The discount terms will vary from company to company. However, the price that you pay for an ESPP will always be significantly lower than the current market price of the stock in that company.

The price you will pay will be determined through a formula which takes into account the company’s stock performance, the employee’s investment in the plan, the employee’s length of service and the amount of the employee’s payroll deduction.

Thus, you may get an opportunity to buy stock at a price which is below the current market price and where, theoretically, the stock’s price will appreciate over time.

Recently, ESPP has become very popular among employers as the average participation rate was found to be roughly 68%, which means that more than two-thirds of employees participate in it.