Unlike a defined contribution retirement plan, the investment decisions that influence a pension are made by the employer. As benefits are paid out, they are withdrawn from a common fund. For instance, retirees often lower their expected rate of return to reflect their more conservative investment choices such as bonds and insurance contracts. With a defined contribution plan, employers often make tax-deductible contributions to employee accounts. Simplified Employee Pensions Simplified Employee Pensions, or SEPs, allow employers with 25 or fewer employees to establish retirement savings accounts for each employee, authorizing tax-deductible contributions to an employee's account.
Contributions are generally tax-free until distributed.
Keogh plans can be either defined benefit or defined contribution types. For defined contribution plans, money purchase pension plans and profit-sharing plans are available. Individual Retirement Accounts Individual Retirement Accounts, or IRAs, were authorized in 1981. In 1997, the Taxpayer Relief Act authorized the creation of Roth IRAs, named for a U.S. senator from Delaware who sponsored the legislation. Most financial institutions can open an IRA account.