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Retirement Plan

The typical categories of a retirement plan include government-sponsored plans, personal plans, annuities, and employer sponsored plans. A 401(k) plan is a defined contribution plan offered by a company to its employees, which allows employees to set aside tax deferred income for retirement purposes in which the employer will match the amount of their contribution (Investopedia dictionary, 2006).

Roth IRA is a tax-deferred individual retirement account, which offers tax-free withdrawal. Roth IRA is a private investment with only the employees share in the contribution while the 401(k) plan is offered for employees of a company in which both the employee and employer shares in the contribution. Roth IRA and 401 (k) plans are developed to help provide workers with means of living once they stop working at the age of retirement.

A 401(k) plan uses pre-tax dollar while Roth IRA uses after-tax dollar. The Roth IRA has less withdrawal restrictions than the 401(k) plan. Under the 401(k) plan, employees can control their own investments and has greater flexibility than other plans since employees can carry-over their 401(k) savings to their new employer. The typical investment choices related to a 401(k) plan include mutual funds, collective investment funds, variable annuities, and pooled guaranteed

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investment contract fund.

Mutual fund brings together funds and invests them into a portfolio of securities. Collective investment funds is a bank or trust company that pools investments of 401(k) plan and allows each investor a proportionate interest in the trust fund assets. Insurance companies through a variety of contracts with the employer offer variable annuities. The basic features of annuities include interest and death benefit provided during the term of the contract. Pooled guaranteed investment contract funds provide a common fixed investment option.

Employer’s contribution under the 401(k) can be in the form of company stocks that allows employees to increase their investments or share in the company. An employee who leaves a company can choose either to “rollover” his or her 401(k) retirement plan into a new individual retirement account. The 401(k) plan rollover eliminates the immediate tax liabilities of an employee. When an employee fully or partially withdraws his or her 401(k) plan before the age 59 ½, he will be liable for the current income taxes on the qualified amount withdrawn.

In financial planning, asset allocation may mean the risk involved in making financial decisions and it depends on the type of assets used and is different from year to year. Front-end load is a commission or sales fee charged at the time of the initial purchase of an investment and is deductible from the investment amount thus lowering the size of the investment (Investopedia dictionary, 2006). Back-End load on the other hand is a fee that an investor pays when selling a mutual fund within a certain number of years (Investopedia dictionary, 2006). Stock-indexed fund is a portfolio of investments weighed using the stock-exchange index to determine its performance.

An annuity is a sequence of equal periodic payments made at equal time intervals for purposes of paying a loan or creating a fund. Ordinary annuity is an annuity whose payments are due at the end of each payment interval while annuity due is an annuity whose payments are due at the beginning of each payment period. When the future fund value of an ordinary annuity is determined using the simple interest formula method, it means that interest is computed on a yearly basis.

Bibliography

Investopedia dictionary (2006). Retrieved December 21, 2006 from Investopedia web site: http://www.investopedia.com

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