Types of Employer Retirement Plans

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Types of Employer Retirement Plans

Compared to your parents’ or grandparents’ era, today’s Internal Revenue Service rules permit a full palette of retirement plan options provided by your employer. There is a hue and color to suit most employers—and employees. Here we discuss several of the most common of these plans.

401(k)s

You have probably heard or read about 401(k) plans; or perhaps you are one of the more than 60 million Americans who participate in one. 401(k) and other plans enable employers to assist their employees’ retirement planning efforts through contributions to each participating employee’s account. In addition, all employees—regardless of the amount of their salary or wages—can contribute to the plans through regular payroll deductions. Employees generally can choose to invest their 401(k) retirement funds in a number of alternatives—such as stocks and bonds, mutual funds, money market funds, and annuities.

SIMPLEs and SEPs: for smaller companies

While larger companies often provide 401(k) plans, smaller companies sometimes provide one of two types of individual retirement accounts (IRAs); both are less costly to administer than 401(k)s. The savings incentive match plan for employees (SIMPLE IRA) serves companies with 100 or fewer employees, including self-employed people. It may be structured like a 401(k) plan or a traditional IRA, except that the lower annual contribution limit does not apply. The simplified employee pension (SEP IRA) enables a company to establish an IRA for each employee. For SEP IRAs established after 1996, however, only the employer may contribute; no employee contributions are allowed. For SEP IRAs established before 1997, employee contributions are allowed, but only if the employer had 25 or fewer employees eligible to establish a SEP IRA during the previous year. Again, the lower contribution limit requirement does not apply. If you are self-employed, you also may establish a SEP for yourself.

Keoghs: for the self-employed

A Keogh plan (formally known as an HR-10 plan) provides another option if you are self-employed or an employee of an unincorporated business. It may take the form of a 401(k) or almost any other type of retirement plan qualified in the Internal Revenue Code.

403(b)s: for non-profits

Finally, 403(b) plans offer a retirement savings option to many public school teachers, professors, and employees of non-profit organizations. These plans enable you to contribute pre-tax compensation to a mutual fund account or an annuity contract purchased from an insurance company.

They share certain similarities

Over the course of your working life, you may participate in a variety of employer retirement plans. While each plan has somewhat different rules—in the amounts and types of contributions permitted—all share several positive attributes. All offer higher tax-deductible contributions than individual retirement accounts (IRAs), and all enable an employer to contribute toward the retirement needs of employees, making retirement planning easier for many people. Understanding how each plan can contribute to your retirement goals helps you ensure the future of your dreams.