What Types of Retirement Plans Are Available?

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What Types of Retirement Plans Are Available?

The government has established a number of plans that help you save and invest for your retirement. You may have heard such terms as Social Security, 401k plan, and IRA. Some of them are sponsored by the government itself, some are sponsored by your employer, some are set up by insurance companies, and others are set up by you, on your own.

Many retirement plans shelter your money from taxes. They are tax-deferred, in other words. Tax-deferred means that the earnings that build up in your retirement plan are not taxed, as long as they stay in there. However, once you draw them out, either at retirement or before, your earnings from these plans may be taxed.

These plans tend to be complicated, with a lot of rules for contributing money, withdrawing money, and avoiding penalties. Let’s take a basic look at the most common ones.

401k plan

401k plans are retirement plans offered by many for-profit companies to their employees. They let you contribute a portion of your paycheck (before taxes) to your plan, and your employer may match a certain amount of your contributions. This matching is like free money to you. You will not be taxed on the money in it (on your contributed amount as well as any earnings in it) until you take it out during retirement.

403b plan

403b plans are offered by certain non-profit companies, such as some public schools, charities, governments, and colleges. As with 401ks, you contribute money to one out of your paycheck (without it being taxed), and it builds over the years. You then are taxed on the money when you take it out during retirement.

457b plan

457b plans are similar to 403b plans in most ways, but have certain differences regarding contributing and withdrawing your money.

Individual retirement account (IRA)

IRAs are individual plans that you set up and manage on your own, as long as you have income earned from working. As with many other accounts, you can contribute money to your account pre-tax, and when you withdraw it years later in retirement, it is then taxed. The amount that you can contribute each year to an IRA is rather small compared to what you can contribute to other plans.

Roth IRA

A Roth IRA is a variation on the IRA. The difference is that you contribute your money after it has been taxed. Then, when you take it out in retirement, you will not be taxed on it. This goes not only for what you originally contributed but also for any earnings on it—which could amount to a lot if the account is many years old.

Defined-benefit pension plan

This is the traditional pension plan. It is a retirement account offered by private employers and governments in which they promise you a specific dollar benefit at retirement. This benefit does not depend on how much you contribute to the plan.

Thrift savings plan

Thrift plans are offered by the federal government to its employees. They are similar to 401k plans in how they work.

Social Security

Social Security is a federal government program that offers retirement and disability benefits. Social Security is paid for by special taxes on your earnings; you cannot contribute to it voluntarily. How much you will receive from it will depend on your earnings during your working life.

Retirement plans have lots of rules to follow—far more than can be described in an article. For example, you need to leave the money in them until you reach a certain age (usually 59½) or else you will not only get taxed on any money you take out, but you will usually have to pay a 10% penalty. There are some situations that let you take out your money early without having to pay a penalty, though.

The amount you can contribute to a plan varies according to plans and changes over time.