Retirement Plans

Retirement plans come in different varieties.  

• Employers plans  (401k, 403b, 457)
• Individual plans  (IRA, Roth IRA)
• Self Employed and Small Business (Sep-IRA,  Simple IRA, Solo 401k)

Employer Plans

The primary savings tool for many investors is their workplace plan.  Hopefully your company has a retirement plan in place.  There are several types:

The most common employer plan is the defined contribution plan (DC).  In this plan the employees or employer or both make contributions to a separate account while the employee is still working.  These arrangements include 401k plans, profit-sharing and money purchase plans.  These accounts generally use a menu of mutual funds and don't promise any guaranteed pay outs in retirement.  The 401k is the most common type.  Its tax deductible and tax-deferred.  When you enroll, your contributions are deducted from your paycheck automatically and sent to your 401k.

403b plans are offered to employees who work in non-profits, health care or education fields.  These plans are very similar to 401k plans.  These plans are also referred to as TSA's-tax-sheltered annuities.  Originally, these plans could only use annuity investments, however mutual funds are now available

The traditional pension plan is also offered by some employers. These pension plans are also known as defined benefit plans (DB).   Under these plans common in the airline and auto industry-the company provides a fixed monthly benefit for the employees once they retire.  The amount of the benefit is often based on set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan.  Employer contributions must be sufficient to fund the promised benefits.

Individual Plans

The Individual Retirement Account IRA account designed to save and grow monies for retirement.   Anyone with earned income or compensation can set one up and can contribute for a non working spouse too.   If you are using a employer plan such as a 401k or 403b you can establish the IRA as a separate retirement account.  You can make contributions at any time in these accounts.  Unlike a taxable account all the earnings or growth are sheltered in these accounts until you withdraw them.

There are several different versions of a IRA's  including Traditional, Roth, and Rollover.  We'll cover each of these in detail and contribution/eligibility for each account.

Self Employed and Small Business

Individuals who are self employed have several different choices.  Small business generally doesn't offer 401k plans but may offer SEP plans or Simple IRA's.   These plans are are ideal if you're completely self-employed or simply bring in some self-employment income from consultation or part-time work.

Here's some advantages:

• Contributions are deductible by the employer when contributed.
• Higher contribution limits so your employees (and you) can set aside larger amounts for retirement.

IRS Publication 560 is available on our Links section.  This resource will explain each plan in detail.