Types Of Employer-sponsored Retirement Plans
Many of the employers offer attractive retirement packages to the employees today. If you are offered one, make sure you get into it after considering your circumstances and the plan put forth by the employer. Some of the more popular plans are mentioned below:
401(k) The 401(k), 403(b) and 457 plans derive their names from the Internal Revenue Code sections. While 403(b) plans are similar to 401(k), only tax-exempt organizations are eligible for the same. 457 plans, on the other hand, are for governmental entities. The employees are given the chance to defer tax on a portion of their income by contributing the amount to a fund for retirement set under the plan. Employers providing 401(k) or 403(b) plans may hand over the option of a Roth version.
Typically, the legal restrictions to the annual contributions that can be made under these plans are higher than those imposed by IRAs. Moreover, employees aged fifty or above are given the additional option to make up catch-up contributions. Others enjoy an equivalent contribution by the employer, making it virtually free money!
The distributions from 401(k), 403(b) and 457 plans are expected to abide within the minimum distribution rules, similar to those with IRAs. The major difference between the two is that under this plan you may be given the chance to continue to contribute even after you turn 701/2.
Solo 401(k) plan Solo 401(k) is a retirement plan meant for a self-employed individual. As the conventional 401(k) is not meant for these people, the solo 401(k) was launched that includes a combination of the features of 401(k) with other plans.
The solo 401(k) is highly beneficial to the self-employed. Under the plan, the individual can make contributions under the 401(k) limit including the relevant catch-up amounts, if any, along with the contributions to a SEP IRA. A three-source contribution, thereby, triples your capital investment towards retirement. But as solo 401(k) is meant for self-employed people, you will have to opt for a 401(k) if you have employees under you. Any contribution, however, needs to possess the requisite amount necessary for the payment. Absence of steady payments into the funds will result in a loss of wealth spent on the cost and administration of the plan.
SIMPLE IRA: The plan, SIMPLE (Savings Incentive Match Plans for Employees) IRA is a program meant for employers with less than hundred employees. Under the plan the employer has to contribute an amount equal to those made by the employees up to a certain percentage limit, typically, 3%, or a flat rate of 2% irrespective of the contribution made by the employee.
The requirements imposed by the law on the contribution ceiling and the catch-up amount are lower than for 401(k) plans. Though the SIMPLE IRA rules and SIMPLE 401(k) plan rules are similar, the minor differences make the SIMPLE IRA preferable. For example, while limited testing is necessary for SIMPLE 401(k), discrimination testing is not called for in SIMPLE IRAs.
Defined contribution plans: It comprises of the money purchase plans and the profit sharing plans that have differing restrictions on the contributions that can be made by the employer and the employee. Where the employer plans are merged with that of the employee, the limit to the annual contribution to the fund by the employee excluding the catch-up amount, if any, brings down what the employer can offer to the plan. .
An ESOP is a variety of defined contribution plan suited for closely-held businesses.
Defined benefit plan: Though not popular these days, under this traditional method the employees are prevented from making contributions to the retirement fund. The whole investment risk is borne by the employer who assures to pay the annual retirement benefit to the employee. While the defined benefit plan funds are often pooled, the defined contribution plan funds are segregated by employees.
A well-structured defined benefit plans is more expensive to initiate, even though they may permit business owners to add significantly more than the customary defined contribution limits. It is on account of the fact that the contribution amount is defined by the benefit it has to generate. Understanding the income that gets generated out of the fund is less significant when compared to recognizing the factors that may affect the future inflow of benefits. Remaining knowledgeable about these basic facts can assist in making the best decision regarding retirement plans.
This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice or opinions and assumes no liability in connection with its use. Please contact Doeren Mayhew for more information.
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