Retirement Basics Types of retirement plans

Retirement saving plans are employee payment plans in which the employee contributes a specific value from each pay check into the saving plan – usually automatically deducted. All of these contributions are pre-tax. For most defined contribution retirement plans the maximum annual contribution is $16,500 (the maximum starting in 2012 is $17,000). After the age of 50, an individual is granted permission to deposit an additional $5,500 unmatched by their employer into their retirement plan (up to $22,500 per year).

Four of the most common types of retirement plans are:

401(k)

The most common retirement saving plan offered of employment, generally offered by corporations.

Roth 40(1k)

A tax-free retirement savings plan for employees that expect to be in a higher tax bracket upon retirement. Contributions are made after-tax and the earnings grow tax free if held to age 59.5 or beyond.

403(b)

In place for public schools, charities, colleges, universities, state government, and other tax- exempt entities. These types of plans often have more strict rules than the 401(k) plans but are very similar in most respects.

457

Same as 403(b), used by the nonprofit organizations stated above. The 457 plan is a deferred compensation plan and offers tax-deferred contributions, without the 10% penalty on early withdrawals. Non-government employees with the 457 plan are ineligible to participate in the catch up program; the limit for government employees is also $5,500.

Federal Government Thrift Savings Plan (TSP)

A retirement savings plan for government employees, both civilian and military personal.

The 401(k), 403(b), 457 and TSP are all tax-deferred until the money is withdrawn. Most employees are willing to match either a percentage of payment earnings or a percentage of salary into their retirement savings plan. More employers will match the contributions of the employees 401(k) and Roth 401(k). It is rare for employers to match a 403(b). Employers can match a 457, more common than 403(b), but not as common as 401(k). With the Thrift Saving Plan, the eligible employee will automatically receive a 1% match. The employer will match dollar for dollar the first 3% of salary the employee contributes.

Other types of plans include:

SIMPLE IRA

SIMPLE IRAs are set up for small businesses of 100 employees or less. SIMPLE IRAs are much cheaper and simpler to administer than 401(k) plans and employers are required to match either dollar up to 3% or a flat 2% for all employees making at least $5,000 annually.

SEP IRA

SEP IRAs are set up generally for business owners and sole proprietors to allow participants to contribute up to $49,000 per year into the plan. If set for more than a sole business owner, all employees must receive the same benefit, which is why it is often only used for single person businesses.