What Are Employer Retirement Plans?

(2 of 6)

What Are Employer Retirement Plans?

Employer retirement plans are exactly what their name suggests: offered by your employer, these investment plans help you accumulate money that can provide you an income in retirement. Most retirement plans are authorized under sections of the Internal Revenue Code—for example, section 401(k) or 403(b)—and all enable you, your employer, or both, to contribute to various investments for your retirement. You do not pay taxes on the earnings until you withdraw funds from the account.

An employer retirement plan permits you and/or your employer to annually contribute larger amounts toward your retirement than are possible with an individual retirement account (IRA). The plan is tied to your employment, so employer contributions cease when you leave the organization, although you usually can roll the investment over into an IRA or other retirement plan.

One advantage of some employer retirement plans is that you can contribute pre-tax dollars to these investments. This enables you to lower your current income for tax purposes and defer taxes until you withdraw funds when you retire and when you may be in a lower tax bracket. There are no finer tax shelters available to employees.