There is no one size fits all employer-sponsored retirement plan. Instead, there are many options out there, and the best one for you depends on a number of factors. In general, an employer-sponsored retirement plan provides useful benefits to both employees and employers. These plans include things like automatic paycheck dedications transferred to savings, tax breaks and some companies even offer to match employee contributions up to a certain amount.
Two Main Categories Of Employer-Sponsored Retirement Plans
There are two main categories that define retirement plans: a defined benefit plan and a defined contribution plan.
A defined benefit plan provides a guaranteed monthly benefit amount at the time of retirement. Also known as pension plans, defined benefit plans are sponsored by employers whom generally hire investment managers to handle accounts. The employer takes on the risk in this type of plan.
A defined contribution plan does not offer the same guaranteed payout at the time of retirement. A 401(k) is an example of a defined contribution plan. These types of plans include contributions from both employer and employee, often at a set percentage rate of an employee’s annual salary. The employee takes on the risk in this type of plan. The overall value of the account will change based upon the value of investments. At the time of retirement, employees receive the account balance based upon contributions plus or minus gains and losses from investments.
Common Types Of Retirement Plans Offered By Employers
There are many types of retirement plans including 401(k) plans, 457 plans, Roth 401(k) plans, SIMPLE plans, 403(b) plans and many more. Talking the options over with a certified accountant will help you to determine the best plan for you.
1. 401(k) Plan
This is the most common type of employer-sponsored retirement plan. Most large, for-profit businesses offer this type of plan to employees. The employee is responsible for funding this plan but many companies offer to match a certain percentage of employee contributions. Employees have the opportunity to select which investments their money goes towards and retain complete control of the account at the time of retirement.
Employee contributions are eligible for annual tax deductions up to $18,000 as of 2016. If you are 50-years or older you are granted a catch-up provision that allows you to contribute an additional $6,000 per year. You pay tax on the money when you go to withdraw it from your 401(k).
Related Article: 7 Things You Need To Know About Your 401(k)
2. Roth 401(k) Plan
This type of plan offers the same benefits as a traditional Roth IRA with the same employee contribution limits as a traditional 401(k) plan. A Roth 401(k) does not offer tax-deductions for contributions, but when you withdraw this money during retirement you will not pay tax as long you are over 59 ½ years old and have maintained money in the account for a minimum of 5 years.
Employees can offer to match contributions to a Roth 401(k), but these contributions must be placed into a regular 401(k). Employee contribution limits remain the same for both Roth 401(k) and 401(k) plans. If you have both a 401(k) and a Roth 401(k), combined contributions to both accounts cannot exceed the maximum contribution allowed to a standard 401(k) plan.
3. 403(b) Plan
A 403(b) plan is virtually the same thing as a 401(k) plan, but it is designated for nonprofit organizations such as hospitals, public school systems, churches and so forth. Employees largely fund these plans, and contributions come with tax deductions up to a specified amount. Employers have the option to match contributions based on a certain percentage. At the time this money is taken out of the account it is subject to taxation.
4. SIMPLE Plan
SIMPLE (Savings Incentive Match Plan for Employees) is an IRA plan typically offered by smaller businesses. Employees make tax-deductible contributions to the plan and employers match contributions up to 3% of the employee’s salary, or make nonelective contributions.
The max amount of money you can contribute to a SIMPLE IRA plan in 2016 is $12,500. If you are 50-years or older the maximum amount goes up to $15,500 (or an additional $3,000).
These four plans are far from your only options. Allow DGK Group to assist you in finding the right employer-sponsored retirement plan for you.