piggybank_dollar.jpgThe defined contribution plan is more popular than its counterpart, the defined benefit pension plan. In fact, there are many types of it. Common examples are the 403(b) and 401(k) plans. Profit sharing programs of private companies are also kinds of defined contribution.

So what’s the logic behind defined contribution?

With defined contribution, every member is given his own personal account. A certain percentage of your income is set aside and place in the retirement program. You will be able to obtain the money once you have already decided to retire.

Advantages of the Program

You can defer your taxes with defined contribution plans. What’s more, you have more control on how much you are willing to save as part of your contribution. There’s also no hassle as you can simply deduct your contribution directly on your payroll. The program itself is favored by many because of its simple calculations and procedures. You can also opt to obtain a lump sum of money and decide where to use it.

However, there are also downsides to it. First of all, because you have more control over your money, there’s a huge tendency that you will be making wrong investment decisions. It’s also very difficult for someone to build his own defined contribution fund if he started late. Worse, you can actually incur penalties if you don’t follow the restrictions and other conditions that govern the program. There are certain times when you can actually withdraw your funds. You may even have to follow the ways for fund withdrawal.