Retirement Plan Types
There are two categories of tax-advantaged Retirement Plans - Employer Sponsored and Individual Retirement Accounts (IRA).
Individual Retirement Accounts (IRA)
Used by most employers, including many non-profits.
A 401(k) is a Retirement Plan made available by a company to its employees,
featuring tax-deferred contributions and growth. Tax-deferred investments
allow deferral of income tax on contributions and taxes on investment growth.
Taxes are not paid until funds are withdrawn during retirement. The plan
may also include matching contributions by the company.
Used by state and federal
governments and agencies. A 457 plan is similar to a 401(k) plan, except
there are never employer matching contributions. Participants can defer
some of their annual income (up to an annual limit), and contributions and
earnings are tax-deferred until withdrawal. Distributions start at retirement
age but participants can also take distributions if they change jobs or
in certain emergencies. Participants can choose to take distributions as
a lump sum, annual installments or as an annuity.
Used by non-profit organizations
such as schools, hospitals, religious entities. A Retirement
Plan similar to a 401(k) plan. However, plan sponsors are only able to offer
fixed or variable annuities as investment options. Proceeds are converted
to an annuity upon retirement. These plans are also referred to as tax-deferred
Used by smaller companies.
Savings Incentive Match Plans for Employees (SIMPLE) Retirement Plans are
attractive for employers because it avoids some of the administrative fees
and paperwork of plans such as 401(k)s. The employer has the option of matching
a certain portion of the employee's deferrals or making non-elective contributions
to all eligible employees (an annual limit applies in both cases). A minimum
compensation eligibility requirement exists for employees who want to join
this plan, and employees cannot establish any other qualified Retirement
Plans at the same time.
A retirement program for self-employed
people or owners of companies with less than 25 employees, allowing them
to defer taxes on investments intended for retirement. This plan allows
employers to contribute on behalf of eligible employees, and all contributions
are tax-deductible as a business expense and can be integrated with Social
Security contributions. In addition, there is no minimum contribution requirement.
Used by individuals. An
Individual Retirement Account (IRA) is a tax-deferred retirement accounts
for an individual that permits an individual to set aside up to $2,000 per
year. Earnings are tax-deferred until withdrawals begin at age 59 1/2 or
later (or earlier, with a 10% penalty). IRAs can be established at a bank,
mutual fund, or brokerage. Only those who do not participate in a pension
plan at work or who do participate and meet certain income guidelines can
make deductible contributions to an IRA. All others can make contributions
to an IRA on a non-deductible basis. A participant is able to roll over
a distribution to another IRA or withdraw funds using a special schedule
of early payments made over the participant's life expectancy.
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