What is a retirement plan?
Retirement plans are financial plans set up by individuals, or businesses for their employees, that aid in the planning for living expenses during retirement.
Generally, individuals or companies make contributions into an account that is then placed in different investment vehicles, such as stocks, index funds, or bonds. Often, these contributions are entered into the account before taxes are withdrawn, allowing for more money to be invested and returns to be made.
These contributions must be made from some form of compensation, including:
- Wages, Salary, bonuses, etc.
- Self-Employment Income (including SE income from partnerships)
- Certain taxable alimony or separate maintenance payments
- Nontaxable Combat Pay
Compensation does not include:
- Income from investments, such as interest and dividends
- Pensions or annuities
- Social Security benefits
- Deferred compensation
- Partnership income that is not SE Income
- S Corp income from Schedule K-1
- Earnings from property (such as rent)
Once you reach a specified age (generally 59 ½), you can then withdraw money from the account. Theoretically, the amount of money in the account has risen exponentially as the economy, and the invested financial assets, have grown.