7 Types of Retirement Plans Offered by Employers
August 28, 2020
By Rahul Iyer
The fact that you are reading this shows that you are being diligent in securing a comfortable life after retirement. If you are an employee, there are several retirement plans offered by different employers. These plans are typically low cost and are great for preparing for life after retirement. Your access to a retirement plan will be based on the nature of your employer’s business as well as their size.
Let’s take a look at 7 of the most common employer-sponsored retirement plans.
1. Defined Benefit Pension Plans
This plan is the most traditional retirement plan. With this plan, an employee receives a fixed monthly payment after retiring.
Contributions are not made to this plan by employees. The benefits that you qualify for after retirement are typically based on your monthly income and the years you have been working at the organization.
One of the downfalls of this plan is that the investment decisions are made solely by the employer. Also, the employee has no control over the funds at the point of retirement.
2. 401(k) Plan
This retirement plan is the most popular of the bunch. They are typically offered to the employees of large businesses. The plan is built upon the contributions of employees. However, most companies provide a partial employer match.
401(k) plans give employees the power to decide on the investments that will make up their 401(k) plan. At the point of retirement, the employee retains full power over the money in their 401(k) plan.
Employee contributions to a 401(k) plan are tax-deductible. The earnings from the investments in the plan are tax-deferred. However, upon retirement, the distributions will be taxed as regular income. Without worrying about taxation, the total funds in a 401(k) can be withdrawn and placed into an IRA or into another employer’s 401(k) plan. Note well that if the funds are not placed into another qualified plan, the funds will be taxed like normal income. To discourage early withdrawals, a 10% penalty is charged if you take funds from your 401(k) before a certain time.
The maximum annual contribution to this plan is $19,500. Employees who are 50 years old or more can make an additional contribution of $6,500 each year.
3. Roth 401(k) Plan
These provide the same benefits of a regular Roth IRA. The rules governing employee contributions in this plan are the same as those for a regular 401(k) plan.
The contributions made to this plan are not tax-deductible; however, investment gains are tax-deferred. The distributions of a Roth IRA plan are tax-free if you are at least 59 ½ and have been contributing for five years or more.
If you withdraw funds from your Roth IRA early, there is a 10% penalty. Investment income will be taxed as normal income.
An employer can partially match contributions, but the employer’s contributions must be placed in a regular 401(k) plan. The contribution limit is the same as a 401(k) plan. If contributions are made to both a 401(k) and a Roth 401(k), they must not exceed the established maximum contribution of a 401(k) plan.
4. 403(b) Plan
This plan is similar to a 401(k) plan. The major difference is that it is designed for nonprofit organizations. This plan is funded by employees and the contributions are tax-deductible.
Employers are permitted to match employee contributions up to an established percentage. The investment earnings of a 403(b) plan are tax-deferred.
5. 457 Plan
A 457 retirement plan is pretty much a 401(k) plan for state and local government employees. They are operated just the same as 401(k) plans.
If an employer offers both a 457 and a 401(k), you can contribute to both at the maximum of each. This means your contributions would be double that of the average employee. Instead of having a cap of $19,500, an individual who qualifies for a 457 can contribute $39,000 annually.
6. SIMPLE Plan
Savings Incentive Match Plan for Employees (SIMPLE) is an IRA plan that is offered by some employers. These plans are typically offered by smaller employees who do not have a retirement plan in place.
7. SEP Plan
Simplified Employee Pension (SEP) plans are designed for small businesses. These enable smaller operations to offer their employees a retirement plan. These plans are also referred to as “SEP-IRA plans” because they are based on IRAs
The same rules and requirements as the typical IRA are applied to SEP plans, but the contribution limits are more attractive. The contribution can be 25% of your income or $57,000, whichever is less.
Now that you know about the plans…
It is important that you plan for your future. Maximizing the retirement plan offered by your employer can make things much more secure after retirement. Take the time to learn more about the plan that is offered by your employer.