This first post is all about employer-sponsored retirement plans. If you're self-employed or your employer doesn't offer a retirement plan. Don't worry I will cover retirement plans for those situations in the next two posts.
There are several different employer-sponsored plans and the main difference between all of the plans are the industry you work in. I worked directly with clients for a few years and it was pretty common for clients to not know a lot about their retirement plans. You don't have to know everything but knowing the basics can help you make sound financial decisions now, so you can retire when you are ready.
So let's get into the different employer-sponsored retirement plans.
401(k) Plan
A 401(k) is a benefit provided by your employer, typically a corporation. Your contributions and earnings will grow tax-free until you withdraw them. Your employer is not required to make contributions to the plan but they may offer to match a percentage of your contributions as a part of your benefits package, for example, if you contribute 3% your employer may also contribute 3%.
The maximum contribution for 2017 is $18,000 a year and $22,000 a year if you are age 50 and over. Your contributions are tax-deductible in the year they are contributed. and if you withdraw the funds before you turn age 59.5 you may be subject to a 10% early withdrawal penalty.
The exceptions to the 10% penalty are death, a permanent disability, setup of periodic payments over your lifetime, used to pay medical expenses more than 10% of your adjusted gross income, or to pay an IRS levy.
403(b) Plan
The 403(b) is basically the same as a 401(k) plan, except it was created for non-profits, school systems (including colleges & universities), hospitals, city government employees, and churches. Everything else, contribution limits, tax benefits, and withdrawal rules are the same as the 401(k).
457 Plan
The 457 is similar to the 401(k) plans but it's for state and local government employees (some colleges/universities). They have the same contribution limits but you typically see the 457 plan available to employees with a higher position and salary. They received the benefit of contributing the full amount to both the 401(k) and the 457 plan.
Savings Incentive Match Plan for Employees (SIMPLE IRA)
A Savings Incentive Match Plan for Employees called a SIMPLE IRA for short, is provided by smaller employers (or self-employed individuals) who don't offer 401k, 403b, or the 457 plans. Contributions to the plan are tax-deductible and the employer must match up to 3% of the contributions or make a nonelective (not based on salary reduction) contribution.
The maximum contribution for 2017 is $12,500 and if you are age 50 any over you can make catch-up contributions of $3,000. If the employee contributes to other retirement plans they are limited to total contributions of $18,000 (in 2017) across all plans.
The contributions to the plan are tax-deductible and distributions are taxed at ordinary income (your tax rate).
Simplified Employee Pension Plan (SE -IRA)
The SEP IRA is a plan also available to the self-employed and small businesses, they have the same investment, distribution and rollover requirements as a Traditional IRA, but the SEP IRA has a larger contribution limit. The SEP IRA is the one account where the employer must contribute for the employees. The employees cannot contribute on their own.
The maximum contribution is 25% of compensation or $54,000 for 2017 and any distributions from the plan are taxed at your tax rate.
In all of the retirement plans, you have the option to invest in funds (mutuals funds, stocks, bonds) selected by your employer. If you don't have a retirement plan and are currently employed, check with your employer to see if they offer retirement plans as a benefit. If they don't, look into opening a Traditional or a Roth Individual Retirement Account, which I will talk about next week in Part II.
At what age do you plan to retire? Let me know in the comments below.
