Retirement planning is about looking forward to an exciting time of life. And for many, a broader retirement strategy starts with a retirement plan offered by their employer. It’s not the only piece, but it can be a big one. Understanding the type of account your employer or prospective employer offers and its benefits is key to making informed decisions in the next step of your retirement planning.
A traditional 401(k) plan allows you to defer receiving a percentage of your salary to invest it for your retirement. The amount you defer is not included in your taxable income until it is withdrawn. Some employers also offer a Roth 401(k) option, in which you can instead make contributions with after-tax dollars, allowing qualified tax-free withdrawals when certain requirements are met. Often, employers will offer to match a portion of the money you defer as an employment benefit, increasing your investment, but they are not necessarily required to do so.
Money contributed to a 401(k) is generally invested in stock and bond funds or more conservative options such as money market funds. The exact choices available to you will vary by plan, but a financial advisor like Global View can help you decide the best approach. It’s important to note that once funds are invested, withdrawing them before the age of 55 often results in a 10% additional tax, although there are exceptions, such as medical hardships.
A 403(b) plan is available to employees of public schools and certain charitable or tax-exempt organizations. Much like the 401(k) plan offered by for-profit companies, you can save for retirement through payroll contributions. The rules and tax advantages are also similar to a 401(k) program, with traditional tax-deferred savings and Roth options available depending on what your employer offers.
A 403(b) does include some unique benefits not available in other plans. One difference is a catch-up provision for employees with 15 years of service at the same eligible employer. This provision enables individuals to contribute funds above the typical yearly limit to increase their retirement savings. There are additional rules that govern this catch-up mechanic.
The 457(b) plan is designed for state and local government employees as well as those of some tax-exempt organizations, such as private universities. While this tax-deferred plan operates much like a 401(k), with investment options such as mutual and bond funds, it differs by some of its catch-up and withdrawal provisions.
As with a 403(b), a special catch-up provision may allow contributions beyond what is normally permitted. Examples include an age-based catch-up or a provision for increased contributions during the three years leading up to the plan’s normal retirement age. Additionally, government plans may allow participants to withdraw money after leaving their employer without the 10% early-distribution tax that usually applies to early 401(k) withdrawals. However, different rules apply to non-governmental 457(b) plans and to amounts rolled into a 457(b) from another retirement plan.
A 401(a) is an employer-sponsored, qualified retirement plan that allows employers to establish specific rules for how employees contribute toward retirement. These plans are commonly offered by government agencies, public universities, and other public-sector employers.
Unlike a 401(k), where employees typically choose how much of their salary to contribute, a 401(a) plan generally establishes a predetermined contribution amount or percentage. Contributions are generally invested in options offered through the plan, such as mutual funds or target-date funds. The specific features of a 401(a) vary depending on the employer.
The SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is designed primarily for small businesses with under 100 employees who received at least $5,000 in compensation in the preceding year. As with a 401(k), employees can contribute a portion of their pay to an IRA through payroll deductions. What sets this plan apart is that employers are legally required to contribute, generally in the form of matching employee contributions or making a separate contribution on behalf of eligible employees.
Contributions can provide tax advantages for both employee and employer, and your investment can be directed toward mutual funds, stocks, or bonds offered through the financial institution that holds the account. SIMPLE IRAs generally have lower contribution limits than 401(k) plans, but they can provide a relatively straightforward way for small employers to offer retirement benefits to their employees. Unlike a 401(k), the employee doesn't contribute to a large employer-held plan account; each participant has their own SIMPLE IRA.
Whatever retirement plan you have from your employer, you may want to supplement it with additional retirement savings. The team at Global View can help you understand your options and custom build a retirement plan that meets your needs. With the right help, you can set a savings strategy that puts you on the path to a rewarding retirement. Contact us today to schedule a consultation.
Should I participate in my employer-sponsored retirement plan?
Participating in your employer’s retirement plan is a great way to start building towards a secure retirement. While there are other options to explore, many employers offer matching contributions, so not participating may mean losing out on a significant financial benefit.
How much can I contribute to my retirement plan?
The IRS sets limits on all tax-advantaged retirement plans. The exact amount depends on the plan you’re participating in and can change year-to-year. Your employer or financial planner can advise you on the current limit.
What is the difference between qualified and nonqualified retirement plans?
Because retirement plans have tax implications, they must follow rules regarding maximum contributions and the timing of withdrawals. A qualified plan, such as a 401(k) or 401(a), meets specific requirements, including rules governing contribution limits and distributions. A nonqualified plan has fewer restrictions and may allow employers to provide additional benefits to high-income earners beyond the limits of qualified plans, but without the same tax benefits or safeguards.
What is a tax-advantaged retirement plan?
A tax-advantaged retirement plan offers special tax benefits, which may include deferring income taxes on contributions and investment earnings or allowing qualified withdrawals to be made tax-free, depending on the type of plan.
What happens to my employer-sponsored retirement plan if I leave my job?
The money you contribute to your retirement plan is yours, even if you leave your job, but funds contributed by your employer may be subject to certain vesting requirements. You can keep the fund where it is, transfer it to your new employer-sponsored plan for easy tracking, or roll it into an IRA.
Can I have more than one employer-sponsored retirement plan?
Yes, if you move employers or have multiple employers you may end up with multiple retirement plans. Depending on the plans’ rules, you may be able to merge them into one plan or leave them to grow independently of each other.
What is the difference between an employer-sponsored retirement plan and an IRA?
An employee-sponsored retirement plan is any plan set up through your workplace. Oftentimes, employers offer incentives for retirement plans, such as a set dollar amount or matching percentage to help your savings grow. An IRA is separate from your employer plan and may offer you greater flexibility with investment decisions.