Legal Definitions - individual account plan

An individual account plan is a type of retirement or savings plan where a separate, distinct account is established for each participant. The amount of money available to the participant upon retirement or withdrawal depends entirely on the total contributions made to their specific account, as well as the investment gains or losses accumulated over time. In such plans, the participant typically bears the investment risk, meaning the final value of the account is not guaranteed but fluctuates with market performance.

• Scenario: Sarah works for a tech company that offers a 401(k) plan. Each month, a portion of her salary is automatically deducted and deposited into her personal 401(k) account, and her employer also makes matching contributions. Sarah chooses how her funds are invested from a selection of mutual funds provided by the plan administrator.

  Explanation: This is an individual account plan because Sarah has her own distinct account. The retirement funds she will eventually receive depend directly on the total contributions made by her and her employer to her specific account, and how well the investments she selected perform over time. There is no guaranteed payout; its value is tied solely to her individual account's performance.

• Scenario: David is a freelance graphic designer and wants to save for retirement independently. He opens an Individual Retirement Account (IRA) with a financial institution. He makes regular contributions to this account and decides to invest the money primarily in a diversified portfolio of exchange-traded funds (ETFs).

  Explanation: David's IRA is an individual account plan because it is a personal savings vehicle where he has a dedicated account. The amount he will have for retirement is determined solely by the contributions he makes to his IRA and the investment returns (or losses) generated by the ETFs he chose within that account.

• Scenario: Emily is a public school teacher. Her school district offers a 403(b) plan, which is a retirement savings plan similar to a 401(k) but for employees of public schools and certain tax-exempt organizations. Emily contributes a percentage of her salary to her 403(b) account, and she has options to invest these funds in various annuities and mutual funds.

  Explanation: Emily's 403(b) is an individual account plan because it establishes a unique account for her. Her future retirement savings are directly linked to the contributions she makes and the investment performance of the specific funds she selects within her 403(b) account. The final benefit is not a fixed amount but rather the accumulated value of her individual account.