A variable benefit plan is an attractive option to workers looking to take advantage of the potential for higher returns, but with the cost of increased market risk. It is important to remember that since the account value will go up and down depending on the performance of the investments, past performance is not a guarantee of future returns.
Unlike a defined-benefit plan, a variable benefit plan does not guarantee a fixed income at retirement. It also does not provide any protection against life events such as illness, disability, unemployment or death. Despite this lack of protection, variable benefit plans still offer many advantages to those looking to supplement their retirement savings.
One major advantage of variable benefit plans is that contributions are tax-deferred. This deferral allows the account holder to potentially benefit from the effects of compound interest, which can translate into higher returns. Additionally, many variable benefit plans are portable, meaning they can be rolled over into another employer's plan or into an individual retirement account without tax penalty. This gives account holders more flexibility in terms of their retirement planning.
Contributions to a variable benefit plan are made with after-tax dollars. An exception to this rule is 401(k) plans that allow for pre-tax contributions, wherein a portion of the worker’s salary is taken directly from the paycheck before taxes and put into the retirement account. However, this option is not available with all variable benefit plans. Additionally, many variable benefit plans have an annual contribution limit, which should be taken into consideration when formulating a retirement savings plan.
Finally, it is important to understand the taxes on withdrawals from a variable benefit plan. Taxes vary from plan to plan, but most require that withdrawals be made with ordinary income tax, as well as an additional 10 percent penalty tax if the money is taken out prior to age 59 ½.
For workers looking to take advantage of the potentially higher returns offered by a variable benefit plan, it is essential to conduct proper research and understand the risks associated with their investments. To ensure their money is managed and monitored properly, workers should work with a financial professional before making any major decisions.
Unlike a defined-benefit plan, a variable benefit plan does not guarantee a fixed income at retirement. It also does not provide any protection against life events such as illness, disability, unemployment or death. Despite this lack of protection, variable benefit plans still offer many advantages to those looking to supplement their retirement savings.
One major advantage of variable benefit plans is that contributions are tax-deferred. This deferral allows the account holder to potentially benefit from the effects of compound interest, which can translate into higher returns. Additionally, many variable benefit plans are portable, meaning they can be rolled over into another employer's plan or into an individual retirement account without tax penalty. This gives account holders more flexibility in terms of their retirement planning.
Contributions to a variable benefit plan are made with after-tax dollars. An exception to this rule is 401(k) plans that allow for pre-tax contributions, wherein a portion of the worker’s salary is taken directly from the paycheck before taxes and put into the retirement account. However, this option is not available with all variable benefit plans. Additionally, many variable benefit plans have an annual contribution limit, which should be taken into consideration when formulating a retirement savings plan.
Finally, it is important to understand the taxes on withdrawals from a variable benefit plan. Taxes vary from plan to plan, but most require that withdrawals be made with ordinary income tax, as well as an additional 10 percent penalty tax if the money is taken out prior to age 59 ½.
For workers looking to take advantage of the potentially higher returns offered by a variable benefit plan, it is essential to conduct proper research and understand the risks associated with their investments. To ensure their money is managed and monitored properly, workers should work with a financial professional before making any major decisions.