Types of Retirement Plans
A retirement savings plan funded primarily by the pre-tax contributions of employees; employers frequently match contributions to encourage participation.
Similar to the 401(k), this type of retirement plan is funded primarily with employee elective salary deferrals. This type of plan is limited to public schools, public hospitals, and tax-exempt or non-profit organizations such as religious, charitable, or scientific institutions.
Individual Retirement Account (IRA)
IRAs are Individual Retirement Accounts that let your investments grow tax-deferred until you begin regular withdrawals which are required after reaching age 70 ½, but may occur as early as age 59 ½ without penalty Contributions are limited, and deductibility of contributions depends on salary level and whether the IRA owner participates in an employer-sponsored retirement plan.
In Roth IRAs, individuals contribute after-tax dollars to the account. Contributions are non-deductible, but the growth of these investments can be distributed tax-free. A Roth IRA permits tax-free and penalty-free withdrawals of earnings after five years, and withdrawals of contributions at any time. Roth IRAs are not subject to the minimum distribution requirements.
The Spousal IRA allows a working spouse to make contributions to an IRA for a non-working spouse, if the spouses file a joint tax return for the taxable year and the amount of compensation in the non-working spouse’s gross income for the taxable year is less than the compensation includable in the working spouse’s gross income for the taxable year.
A Simplified Employee Pension (SEP) is a plan whereby employers make contributions to their employees’ retirement accounts. A self-employed individual can also utilize a SEP.
Savings Incentive Match Plans for Employees (SIMPLE) plans allow certain small employers to set up a retirement plan for employees. A self-employed individual can also contribute to a SIMPLE for him or herself.
Defined Benefit Plan
A defined benefit plan promises a specified benefit at retirement. The employer estimates the benefit, generally based on a formula that considers length of service and compensation, and makes contributions to the plan.
Under a profit sharing plan, the employer must agree to a specified formula of allocating contributions to all participating employees. However, the employer is not required to contribute a specific percentage of profits, and has the discretion to make no contributions at all in any given year.