Roth IRA Rules

There some problems with defined contribution retirement plan. Unlike defined benefit plans, a defined contribution plan doesn't promise a pre-set (constant) amount upon retirement. Instead, in those types of plans, the employee or employer contributes to the employee's individual retirement account, at a set rate, which could be for example 5% of the annual earnings. In some plans, both sides contribute. But the reason why the amount that the employee will be getting upon retirement is not fixed is because the funds are invested in something and it all depends on how good this investment turns out to be by retirement time.

At the end, you (the employee) will receive a certain amount which consists of all the contributions minus or plus the investment losses or gains. So if your retirement funds are properly investment, you will be getting all your contributed money plus the gains from the investments so you could well be heading to a vacation in Hawaii. And then again, there is the not so bright side of risk which is the source of all problems with defined contribution retirement plans. The amount of money stored in a defined contribution retirement plan fluctuates depending on the results of the investments being made.

The main thing is to guarantee you a normal and calm future and easy retirement. So the problem with defined contribution plans is that one is not sure what to expect and whether or not the whole risk will be worth it. If you don't have a good broker, it could be a big gamble with your life. But as always, there are two sides of this coin too. For example, if you consider the other option - defined benefit plans, you will see that they are ongoing liability for the company as the funding for them must come from your earnings. But the good thing about defined contribution plans is that employees know what to expect for their retirement days as the amounts they will get every month are fixed. There is no uncertainty surrounding defined-benefit plans. The only uncertainty here is how much money will be contributed.

The interesting thing here is that big corporations like IBM and HP are moving towards defined contribution retirement plans as this will save them a lot of money. For example, in the case of IBM, this move will save the company a huge amount that's somewhere between $2.5 billion to $3 billion by the year 2010.

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