Employer Retirement Plans
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Other
tax-deferred savings plans let you invest a portion of your earned income
on a systematic basis and further build your nest egg. Don't overlook the
fact that you can fund an IRA and still participate in a retirement plan
where you work, so take every option available to you.
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Most employer-sponsored plans let you make contributions through payroll
deduction. You usually have a choice of investment options to choose from
and you benefit from tax-deferred growth until you begin withdrawals.
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401(k)
Plan:
This plan can be offered to employees by all types of
businesses and corporations. While the specific requirements vary by
employer, a 401(k) allows you to utilize pre-tax dollars to fund your
retirement. It can be structured as a "cash" or
"deferred" profit sharing plan, or as a salary reduction plan.
Either way, you benefit from contributions that reduce your taxable income
and accumulate tax-free until withdrawal. Some employers even match your
contributions.
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403(k)
Plan:
If you are employed by a non-profit organization (hospital,
church, school or charitable foundation), you are eligible to participate
in a 403(b) if it is offered by your employer. Much like a 401(k), it
offers a salary reduction plan, tax-deferred growth and possibly matching
employer contributions.
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Keogh
Plan:
Keoghs are a tax-advantaged retirement plan
that allows participants to contribute up to $49,000 or 25% of their
eligible income (whichever is less) each year. Contributions are made
pretax, and investment earnings aren't taxed until withdrawals are taken.
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Types of
Keogh Plans:
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Profit
Sharing Plans:
A Profit Sharing Plan is one of the most flexible of all qualified
retirement plans. Contributions are discretionary, meaning you can raise,
lower, or eliminate contributions as your profits dictate from year to
year. Profit sharing plans can be integrated with Social Security, an
advantage which can provide business owners and key employees with
additional benefits.
Profit Sharing allows a business
owner to make annual contributions up to 15% of earned income to each plan
participant. The employer may change the percentage of contribution in
certain years.
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Money
Purchase Pension Plans:
A Money Purchase Pension Plan allows a company to make annual
contributions that are not tied to profits. In many ways it operates like
a profit sharing plan except you are required to contribute the same
percentage of employees' salaries each year. For added flexibility,
offering both a profit sharing and money purchase pension plan gives you
the ability to boost contributions when you want.
Money Purchase Pension Plans allow
business owners to contribute up to 25% of earned income each year. The
benefit of the higher contribution limit must be weighed against the fact
that once a contribution level is selected, annual contributions must be
made at that level.
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Paired
Plans:
These allow the maximum flexibility by combining Profit Sharing and Money
Purchase Plans. You may elect to contribute up to 10% of
earned income to a Money Purchase Pension Plan (a fixed contribution
level), and provide the option of contributing up to an additional 15% of
earned income to a Profit Sharing Plan. In this situation, the Keogh Plan
allows, but does not require, annual contributions of up to 25% of earned
income (or $49,000, whichever is less).
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Municipal
Deferred Compensation Plan:
Employees of certain state and local governments are eligible to
participate in a Deferred Compensation Plan, to which they must contribute
a percentage of their income.
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Simplified
Employee Pension Plan (SEP-IRA):
This plan is especially suited for the
self-employed, unincorporated businesses or small corporations. It allows
the employer to make contributions on your behalf to a tax-sheltered
retirement savings plan up to $49,000 for the 2009 tax year. You can elect
to receive the contributions in cash, but if you elect to have
contributions made to the SEP, those contributions are excluded from gross
income. SEP-IRAs are much simpler to administer and maintain than Keoghs.
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Simple
Plan (Simple IRA):
This plan offers the simplicity of an SEP-IRA but is
primarily funded with employee deferrals of up to 100 percent of
compensation with an annual maximum of $11,500 for the 2009 tax year.
Additionally, participants age 50 and older in 2009 may be able to make an
additional annual $2,500 catch-up elective deferral contribution to their
SIMPLE-IRA. This plan may be more attractive than an SEP-IRA because
employer contributions are less, as the employee contributions primarily
fund the plan.
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