From
Your Perspective:
Small business retirement plans
Money purchase
plans
A
money purchase plan
is another type of
Keogh
defined contribution plan. It’s a less flexible option than the
profit-sharing
plan, which it resembles in setup, tax benefits, and contribution
limits. Instead of letting you vary annual contributions depending on
profits, a money purchase plan requires you to contribute a certain
percentage of income for all eligible employees every year, regardless
of business performance.
Because of
this inflexibility, money purchase plans aren’t popular all by
themselves. However, you can use a paired plan — one that combines
a profit-sharing plan with a money purchase plan, so you can contribute
both a fixed and a flexible amount each year without running the risk
of being committed to a large contribution when business is slow.
Keogh plans generally involve a
vesting
requirement: In other words, to receive full benefits, employees must
be with the company for a certain period of time. Some advisers believe
you can give your employees an incentive to stick with the company by
offering a plan with a vesting structure.
