How is a defined-benefit plan different from a defined-contribution plan?A.A defined-benefit plan guarantees a specific payout upon retirement.B.A defined-benefit plan doesn't allow people to use the money until a set age.C.A defined-benefit plan earns compound interest.D.A defined-benefit plan allows tax-deferred contributions.SUBMITarrow_backPREVIOUS
Question
How is a defined-benefit plan different from a defined-contribution plan?A.A defined-benefit plan guarantees a specific payout upon retirement.B.A defined-benefit plan doesn't allow people to use the money until a set age.C.A defined-benefit plan earns compound interest.D.A defined-benefit plan allows tax-deferred contributions.SUBMITarrow_backPREVIOUS
Solution
A defined-benefit plan and a defined-contribution plan are two types of retirement plans that differ in several ways:
A. A defined-benefit plan does indeed guarantee a specific payout upon retirement. This payout is typically based on factors such as salary, age, and the number of years of employment. On the other hand, a defined-contribution plan does not guarantee a specific payout. Instead, the retirement benefits depend on the performance of the investments made with the contributions.
B. Both defined-benefit and defined-contribution plans typically have rules about when funds can be withdrawn without penalties, often not until a set age such as 59.5 in the U.S. However, this is not a distinguishing feature between the two types of plans.
C. Both types of plans can earn compound interest, depending on the specific investments chosen within the plan. However, this is not a distinguishing feature between the two types of plans.
D. Both defined-benefit and defined-contribution plans allow for tax-deferred contributions in the U.S. This means that the contributions are made with pre-tax dollars and the funds are not taxed until they are withdrawn. However, this is not a distinguishing feature between the two types of plans.
In summary, the main difference between a defined-benefit plan and a defined-contribution plan is that the former guarantees a specific payout upon retirement while the latter does not. The retirement benefits from a defined-contribution plan depend on the performance of the investments made with the contributions.
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