Money Purchase Retirement Plan (2024)

FAQs

Money Purchase Retirement Plan? ›

A money purchase plan is an employee retirement benefit plan that resembles a corporate profit-sharing program. An employer deposits a percentage of a participating employee's salary in the account every year, but the employee is not permitted to contribute to the fund.

Money Purchase Pension Plan vs 401(k)

In a money purchase plan, the employer provides the funding with optional employee contribution. With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions.

Because a money purchase plan consists solely of employer money, many employers require a participant to remain employed for a period of time before the account balance is 100% vested. Vesting is simply the amount of the account balance that a participant can take with them when the leave service with the employer.

In the following pages, you'll learn how your tax-advantaged money purchase plan works. What is a money purchase plan? A money purchase plan is a retirement plan that is “qualified” under Section 401(a) of the Internal Revenue Code. Each participant has a plan account to which contributions are made.

Money purchase plans are employer-sponsored, defined-contribution retirement plans, like 401(k)s and 403(b)s. As with other workplace retirement plans, contributions to money purchase plans grow tax-deferred, and employer contributions may be tax-deductible for the employer.

Contribution limits

The lesser of 25% of compensation or $69,000 for 2024 ($66,000 for 2023; $61,000 for 2022; $58,000 for 2021; $57,000 for 2020, subject to cost-of-living adjustments).

Money purchase schemes - a pension pot which is built up through contributions and investment returns. The level of retirement benefits will be dependent on the value of the pension pot when benefits are taken. Defined benefit schemes- this type of scheme pays a guaranteed income for life.

Employees might become vested in 20% of their employer's matching contributions after two years, 60% after four years and 100% after six years.

When you leave a job, only vested contributions are yours to take. Any unvested contributions are returned to the employer. You can choose what to do with those vested contributions.

Vesting in practice

Employees only own their employer's contributions once they meet a specified term of employment within the company and the funds become “vested.” If someone is 100% vested, they have 100% ownership of their 401(k) assets — even amounts the employer contributed.

Who funds a money purchase plan? ›

The employer makes all required contributions to a money purchase plan according to a fixed and determinable formula.

A money purchase plan is a qualified retirement savings plan where the employee does not pay taxes on the money until it is distributed.

If you have a 401(a) with your existing employer and you leave that job, you can either keep the funds in the 401(a) plan, roll them over into another plan – such as another 401(a), 401(k), a 457, or an IRA – or cash the funds out.

YAMPE. 2025. - 1/9 the money purchase limit. $32,490.

The primary distinctions between these two retirement plans are in how contributions are made, how benefits are determined, and the level of predictability they offer. Money Purchase Plans involve fixed contributions and individual investment accounts, while Cash Balance Plans promise a specific benefit at retirement.

Traditional and Roth 401(k)s may be the most common types of retirement plans, often offered at large employers. Smaller employers may favor SIMPLE (Savings Incentive Match PLan for Employees) and safe harbor 401(k) plans, which can be less complex and costly to administer.

adjective. : of, relating to, or being a plan for retirement income in which contributions are at a fixed rate and benefits are determined by what the money thus set aside will buy.

Key takeaways

Prioritize savings if you don't have an emergency fund. Consider investing what you can if you're eligible for a 401(k) match. Choose saving over investing if you'll need the cash in the near future.