In contrast to a defined benefit plan, a defined contribution plan, such as a 401(k) plan (or similar salary-reduction plans including a 403(b) plan, a 457 plan or the Thrift Savings Plan) does not promise to pay you a specific benefit at retirement. Under a defined contribution plan, your employer generally allocates contributions to your account, often in the form of matching contributions. As an employee, you may be able to make contributions to your account within the plan. Your retirement benefit payable from a defined contribution plan depends solely on the value of your account balance when you retire.
Make the most of your defined contribution plan.
- Continue adding to your tax-deferred employer retirement savings plan every month while you are working, especially if you didn’t start saving seriously for retirement until later in life.
- Maximize the amount that you contribute to your retirement savings plan and do your best to take advantage of as much, if not all, of any employer matching contribution that you can. In effect, a match is free money.
- Do not spend your retirement plan savings until you reach retirement; if you do it will have a negative impact on your ability to pay for retirement.
- Don't cash out your defined contribution plan and take a lump sum. This is usually not a wise option, as it will require you to pay taxes on the entire amount at one time, rather than spreading the taxation out over possibly many years by taking periodic distributions in retirement. Also, once the money is out of a plan, chances are that it may be spent much too quickly.
- A major decision that you will need to make with your defined contribution plan is how to invest the money. Different plans have different choices, and this is where professional advice from an objective financial planner or retirement seminars held at your workplace can be extremely helpful.