What is a money purchase plan?

A money purchase plan is a type of defined contribution retirement plan in which the employer makes a specified contribution to an employee's individual account each year. The amount of the contribution is typically a fixed percentage of the employee's salary, and the funds are invested on behalf of the employee.

One key feature of a money purchase plan is that the contributions made by the employer are mandatory, and the plan is funded solely by these contributions. This is different from profit-sharing plans, where the employer has the discretion to make contributions based on the company's profits.

Employees can typically choose how their contributions are invested among a selection of investment options offered by the plan. The value of the account fluctuates based on the performance of these investments.

Money purchase plans are subject to annual contribution limits set by the IRS and are intended to provide employees with a source of retirement income. Upon retirement, employees can typically choose to receive the funds as a lump sum, as periodic payments, or as a combination of both.