There are different types of retirement plans. One can choose as per their suitability. Undoubtedly, every retirement plans are different from each other. While one retirement plan offers a lump sum return, another investment plan can provide fixed monthly income.
Even some organisations provide their employee pension plan to secure their old age expenses. However, some organisations do not even provide any such retirement plan. Now those people need to save into other retirement plans offered by different financial intermediaries.
A money purchase plan is a kind of retirement investment plan which provides a working person monetary assistance during old age. However, one must remember that it also has some advantages and disadvantages, unlike any other investment plan. Before you invest, make sure you have considered every single point.
What is Money Purchase Plan?
By the term purchase, it is not difficult to understand that an employee needs to buy something. Being an employee of an organisation, he needs to buy a retirement plan from his employer. Although it may sound a bit weird, there is far more thing within it.
Unlike 401(k) and 403(b), this money purchase plan is also an organisation that offers to its employees. However, the only difference between them is that while an employee needs not to invest any amount to get financial benefit, one needs to invest some amount through this money purchase plan.
At the end of every financial year, a person needs to fund a particular amount into the year’s retirement plan.
However, the employer also funds some amount of money every year into that employee’s retirement account throughout the entire job tenure. As a result, such a money purchase plan offers a high amount of return after retirement. It has become possible due to the extra contribution of the employee.
Operating structure of Money Purchase Plan
There is no restriction on companies if they wish to provide this retirement plan to their employees. So, it is clear that every organisation can offer its employee a money purchase plan. Both the employer and an employee are required to deposit a particular amount of money into the retirement account.
Employer’s share and employee’s share are both deposited into a separate retirement account. On that saved amount, there applies a specific per cent of interest rate. The employer generally utilises the saved fund into various investment plans. In a nutshell, an employer used to utilise the fund as their principal amount of investment.
However, it has also been observed that some employees failed to deposit a desirable amount of money into the retirement account. When an employer is unable to save as much as required, then he must pay excise tax. So, if you want to save money through this particular retirement plan, then there is necessary to fulfil the minimum threshold amount.
Even if you do not have enough money to contribute through this particular plan, it is better to borrow money. By taking out guaranteed car finance, on the one hand, you may fulfil your wish for a dream car and, on the other, easily deposit the required amount into the retirement account. To begin this plan, an organisation needs to submit form 5500. Along with this form, the IRS of each employee is also required.
Pros of investing in Money Purchase Plan
We have encountered so many questions about the advantages of investing in such a retirement plan. Certainly, there are so many advantages, and that is why most employers are offering this particular retirement plan. Some of them include,
Discount on tax
When an employer offers this money purchase retirement plan to its employees, it means the company is paying tax to the government. The company which offer such a plan do not have any intention to defer tax. On the other hand, if you are an employee of that particular company, you will get extra benefits.
On the one hand, you will be able to save money for the future; on the other, you will get a tax discount. Besides, even into the investment fund, there is no question of tax payment. So, an employee who saves a particular amount through a money purchase plan is the gainer.
Scope of getting lump sum amount
Employees looking for a lump sum amount of money after retirement is the best way to get a desirable amount. This is because when people save money yearly, then a large amount of money is deposited. Similarly, the employer also deposits its share at the end of the financial year.
As a result, even in one year, the total amount cross even more than one expects. Above all, there is a high rate of interest applicable to the saved fund. When a person accesses the fund after retirement, it will become enough for an older person to carry on all the expenses.
This money purchase plan is quite different from other retirement plans. When a person invests in Roth IRA, he can’t withdraw the saved fund even if he requires it before approaching the age of 60. But, the ease of investing in a money purchase plan is, one can easily withdraw money as much as one requires.
Cons of investing in Money Purchase Plan
Associated with additional cost
Usually, this type of retirement plan comes with an additional cost of investment. For this reason, many people often avoid this particular plan.
Financial crisis due to ups and downs
Generally, an employer operates the entire lump sum fund. If there are any ups and downs within the share market, it may cause you a financial crisis. In that case, you may need to utilise the fund which you have borrowed for another purpose. It is not uncommon that people who have borrowed bad credit car finance on instant decision to buy their dream car, due to financial crisis need to use that fund for savings.
So, analyse these cons before investing funds in a money purchase plan. Although it has some pros, still one should not overlook the cons.