defined contribution plan

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Defined contribution plans are a type of retirement plan where the employee and sometimes the employer contribute to a retirement account that is put towards some investment. The employee will receive payments upon retirement that vary with the success or failure of the investment. Defined contribution plans have many benefits including no immediate taxes on gains from the contributions until money is withdrawn at retirement. Usually, the employee must wait until reaching 59 ½ years old before taking out from the account unless they pay a 10% fine. This is to be contrasted with a pension plan where the employer ensures the employee is paid a specific amount of money periodically. 401(k)s are a popular type of defined contribution plan.

[Last updated in June of 2021 by the Wex Definitions Team]