Types of retirement plans

Correct Answer: Traditional IRA

The type of retirement plan that allows pre-tax contributions to grow tax-deferred until withdrawn during retirement is the Traditional IRA. With a Traditional IRA, the contributions made are often tax-deductible and the earnings grow tax-deferred, meaning that you do not pay taxes on the gains until you start taking distributions, typically during retirement when the individual may be in a lower tax bracket. The Roth 401(k) Plan is incorrect because it involves after-tax contributions, which means the contributions are made with income that has already been taxed. However, the withdrawals during retirement are generally tax-free, including the gains, as long as certain conditions are met. The Simplified Employee Pension Plan (SEP) allows pre-tax contributions and tax-deferred growth, similar to a Traditional IRA, but it is specifically designed for self-employed individuals and small business owners, not for the general workforce. A Nonqualified Deferred Compensation Plan (NQDC) allows deferral of compensation by employees and certain owners, which are not provided on a tax-favored basis according to federal tax laws. With NQDC plans, the contributions are not made pre-tax as they are with a Traditional IRA.

Correct Answer: SIMPLE IRA

The SIMPLE IRA is specifically designed for small businesses and self-employed individuals, allowing both employer and employee contributions with simpler administration requirements compared to traditional 401(k) plans. The SEP IRA only permits employer contributions, and the Solo 401(k) is intended for self-employed individuals without employees. The Savings Incentive Match Plan for Employees (SIMPLE) 401(k) is not as commonly used as the SIMPLE IRA for small businesses.

Correct Answer: Defined Benefit Plan

The Defined Benefit Plan, also known as a pension plan, typically offers participants the option to take distributions in the form of a lifetime annuity. This type of retirement plan is employer-sponsored, and benefits are calculated based on factors such as salary history and length of employment, providing retirees with a predictable income stream for life. Other options mentioned do not commonly offer lifetime annuity distributions as a standard feature:1. 401(k) Plans are defined contribution plans where benefits are based on contributions and investment returns. They typically do not offer annuities; withdrawals are commonly made in lump sums or as periodic payments2. Employee Stock Ownership Plans (ESOPs) allow employees to own stock in the company they work for. Distributions in ESOPs usually come in the form of company stock or cash and not typically as annuities3. Tax-Sheltered Annuity Plans, such as 403(b) plans, also allow for individual contributions and investment growth but primarily offer withdrawals or rollovers into IRAs for distribution, rather than lifetime annuitiesTherefore, among the given options, Defined Benefit Plans are known for providing a lifetime annuity distribution option.