When it comes to employer-sponsored retirement plans, there are several options that you can choose from. Moreover, there are those that comes with a low cost, so you will be able to save for your retirement at a faster and more efficient rate. The best thing to do is for you to think carefully about the plan that suits you best, as well as the size and type of your employer, since these all affect your decision.
Employer Sponsored Retirement Plan: Features and Types
Whether you are an employer or an employee, this type of retirement savings plan will work to your advantage. There are several benefits that it comes with including tax breaks, matching contributions (in some cases), and savings deducted from your salary. Considering these benefits, it may help to know more about the available types of this plan to choose from, so you can determine what works for you.
1. 401(k) Plan
In most cases, the 401(k) plan is available from for-profit large businesses, and it is considered as the most popular type of retirement savings from employers. This contribution plan is employee-funded, but there are instances when there is a matching contribution that comes with it. In this plan, you may direct where you put your funds for flexibility and full control over your funds once your hit retirement.
With a 401(k) plan, this includes tax-deductible contributions within the year these are made. You can also grow your funds based on a tax-deferred system. When you retire and take some funds out from this account, amount withdrawn includes income taxes. If you want to roll over funds withdrawn before retirement, you can turn these into Roth or Traditional IRA, as well as 401(k) of a new employer, and there are no penalties or taxes.
2. 403(b) Plan
This plan is similar with a 401(k), but it is only intended for organizations that are not-for-profit such as churches, welfare service agencies, public school systems and home health services. Employees fund these plans, with contributions that are tax-deductible each time these are made. Earnings from investments are tax-deferred, and there are limits to contributions.
3. SIMPLE Plan
The Savings Incentive Match Plan for Employees or SIMPLE Plan is available from smaller employers. In this plan, employees make contributions that are tax-deductible while the employer may either opt for non-elective type of contributions or matching contributions with a maximum of 3 percent of the salary of the employee. In the year 2016, the maximum contribution to this plan is $12,500.
4. Defined Benefit Pension Plans
A traditional retirement plan, these plans are rare nowadays because of the most recent defined contribution plans. In this case the contribution is provided by the employer, and the amount is based on your years of service in the company and income. The employer also decides on investment issues, which limits the employees ability to take control over the investment. Lastly, the employees can expect a fixed amount for the monthly benefit during retirement.
5. Roth 401(k) Plan
The benefit obtained from this type of plan is just like what comes with a regular Roth IRA, yet employees make contributions with policies similar as with a 401(k). Contributions are non tax-deductible, and earnings are tax-deferred. It also offers tax-free distributions for employees 59 1/2 years of age and over, and the plan should be a minimum of 5 years. Early withdrawals are subject to 10 percent penalty and regular income tax.