Money Purchase Plan

What Does Money Purchase Plan Mean?

A money purchase plan is a defined contribution retirement plan in which an employer is required to make a mandatory contribution each year for every employee enrolled in the plan. The employer’s contribution is tax-deductible, while the employee’s contribution is tax-deferred until withdrawal.

This type of plan is also known as a money-purchase pension plan.

Insuranceopedia Explains Money Purchase Plan

The government sets a limit on the employer’s contribution to a money purchase plan. However, the contribution is fixed and does not change based on the company’s profits or losses for the year. This is why some employers prefer a profit-sharing plan, as contributions in a profit-sharing plan are based on the company’s financial performance. At retirement, the accumulated balance can be taken as a lump sum or used to buy an annuity that pays regular income for life.

Employees can still participate in other retirement programs while enrolled in a money purchase plan. Many also pair these accounts with permanent life insurance for the cash value it builds over time.