Employer-sponsored retirement plans are an essential part of many people’s financial strategies for retirement. These plans are typically set up and contributed to by your employer, often with contributions deducted directly from your paycheck. Here are some common types of employer-sponsored retirement plans and their key features:
- 401(k) Plan:
- Contributions: Employees can contribute a portion of their pre-tax income, up to a certain limit set by the IRS each year (in 2022, the limit was $20,500 for individuals under 50).
- Employer Match: Many employers offer matching contributions up to a certain percentage of the employee’s salary.
- Investment Options: Typically, 401(k) plans offer a range of investment options, such as mutual funds, stocks, and bonds.
- Tax Treatment: Contributions are made on a pre-tax basis, meaning they reduce taxable income, and investment earnings grow tax-deferred until withdrawal.
- 403(b) Plan:
- Similarities to 401(k): 403(b) plans are similar to 401(k) plans but are typically offered by educational institutions, nonprofit organizations, and certain governmental entities.
- Contributions: Employees can also contribute pre-tax income, and employers may offer matching contributions.
- Investment Options: Investment options are similar to those in 401(k) plans, often including mutual funds and annuities.
- 457(b) Plan:
- Employer-Sponsored: These plans are typically offered by state and local governments and certain nonprofit organizations.
- Contributions: Employees can contribute pre-tax income, and some plans may offer catch-up contributions for those nearing retirement age.
- Tax Treatment: Similar to 401(k) and 403(b) plans, contributions are made on a pre-tax basis, and earnings grow tax-deferred.
- Defined Benefit Pension Plans:
- Guaranteed Benefit: These plans promise a specific monthly benefit at retirement, typically based on factors such as salary history and years of service.
- Employer Responsibility: Employers bear the investment risk and are responsible for ensuring there are sufficient funds to pay promised benefits.
- Less Common: Defined benefit plans are less common today than in the past but are still offered by some employers, particularly in the public sector.
- Simple IRA and SEP IRA:
- For Small Businesses: These plans are designed for small businesses and self-employed individuals.
- Simplified Administration: They have simpler administrative requirements compared to 401(k) plans.
- Contribution Limits: Contribution limits are typically higher than traditional or Roth IRAs, making them attractive for small-business owners looking to save for retirement.
Understanding your employer-sponsored retirement plan options is crucial for making informed decisions about saving for retirement. Consider factors such as contribution limits, investment options, employer matches, and tax implications when choosing the right plan for your financial goals.
Additionally, regularly review and adjust your retirement savings strategy as your circumstances and goals evolve over time. If you or your company need personalized advice, consider consulting with a financial and/or tax advisor that is familiar with retirement planning.
Kevin O. Stinnett. CLU, CLTC, LUTCF is the owner and president of Lexington Insurance Agency in Lexington, Ky.
