Workplace Retirement

How to choose the right plan?

There are many different types of Workplace Retirement Plans available. The 401k, the 403b, and the 457 plans are the more popular ones. They are quite similar  but still your employer offers the one designed specifically for your type of organization. If you are self-employed, a small business owner, or an employee of a small business, a SEP plan or a Simple IRA are alternative ways to set aside money income tax-deferred for retirement. In some cases, only your employer (not you) can contribute to a 401a. All plans let you contribute additional money into your own Traditional IRA or Roth IRA. However, if you are an active participant in a plan, your contribution to an IRA may be a little more limited.

Types of Workplace Retirement Plans

As stated above, different organizations qualify for different plans. It all depends upon their types and compatibility. Following are some of the more popular Workplace Retirement Plans packages with all their respective explanations, salient features, requirements, and objectives.

1) 401(k) Plans

401(k) plans are a very popular way to accumulate tax-deferred income and earnings for retirement.

Many employers offer 401(k) plans as a way to help their employees to save for Workplace Retirement Plans. It is especially popular with white collar jobs. You, as an employee, is given a choice to choose how much income you wish to contribute. That amount is then automatically deducted from your paycheck and placed into your account within the 401(k) plan. Your retirement savings will continue to grow, until you make a withdrawal, or of course retire and enjoy all the windfall of cash. You do not pay taxes on your salary deferrals or earnings until you take a withdrawal from the plan. Generally, if you take the distribution after age 59½ there is no tax penalty.

Two salient points must be remembered.

• First, only an employer is allowed to sponsor a 401(k) plan for their employees.
• Second, the contributions or premiums deducted from your salary to add into 401(k) fund are all pre-tax deductible.

One difference it has against an IRA is that 401(k) plans permit higher contribution limits and are only available through your employer.

Key Features

Just because your employer sponsors the 401(k)plan does not mean you are completely at their mercy. You can still be diligent and check all the options carefully. There may be other valuable benefits offered in addition to salary deferrals. Check your plan carefully. After all, you are the one who has to sign off on it. Therefore, it is your duty to ensure you get the best deal out of it. These are key features providing a brief overview in order to assist you with your perspective choices:

Optional Participation:

Although some sponsors automatically enroll employees, without their prompting, to promote plan participation. And yet some forget that 401(k) plan participation is still an optional one. You must check in with your employer to determine how you can enroll or if you want to enroll. That will ensure that you are less likely to miss out on opportunities.

Contribution Rate:

You can choose the amount you want to contribute in each payroll up to the established IRS limits. You will also be permitted to change your contribution rate once you are in the plan.

Your 401(k)-plan contribution comes out of your paycheck on a pre-tax basis which lowers your taxable income for that pay period. It must be emphasized that it’s a good thing.

Available Investments:

You can choose from a variety of investment choices that are made available by your employer. These investments can range from Bonds to purchasing shares or stocks in renowned companies.

Deferred Taxes:

Not only do your pre-tax contributions help lower your taxable income each pay period, but all earnings on your contributions grow tax deferred. Note: Some plans offer a Roth 401(k), which permit savings on an after-tax basis.

You will not be taxed on either the contributions or earnings until you make a withdrawal if you are a beneficiary of 401(k). They will continue to be accumulated without cuts till the day of your withdrawal.

Optional Employer Match:

To provide an extra boost to Workplace Retirement Plans savings, many employers have come up with a new scheme. They match a percentage of an employee’s contribution into their 401(k) out of their own pocket up to a certain amount. So if you look thoroughly, a 401(k) match program is like free money for the employees.

Accessing Funds During Employment:

As an optional feature, your employer may allow you to borrow against your plan account up to specified IRS limits. ‘Hardship Withdrawals’; understanding that certain hardships may arise, the IRS permits plans to allow distributions for certain hardship reasons.

Portability:

If you leave your job, you can be assured that you won’t be losing your hard-earned investments. This is a portable kind of plan which means it moves wherever you go. If you get a new job or even decide to open a business, you can still remain in the existing plan or rollover your 401(k) funds into an IRA or another 401(k).

Support:

Your 401(k) provider typically offers many free tools and resources to help you establish savings goals, measure your progress, and to see how financially close you are to meeting your Workplace Retirement Plans goals. The simplest thing to know is, you should follow their advice after you have carefully analyzed all available options so you won’t regret it in the future.

The 457 and 403(b) plans are similar to 401(k) plans, but are typically offered by other types of organizations. The 457 plan is offered to employees of state and local governments. The 403(b) plan is offered only to the employees of public schools and qualified tax-exempt organizations such as higher-education, churches, tax-exempt hospitals, and charities.

Roth accounts:

May also be offered by a plan sponsor under 401(k), 403(b), or governmental 457(b) plans. Roth contributions are made after you’ve paid taxes on the income, but qualified distributions may be taken tax-free in retirement. An ever-increasing number of organizations are more and more flocking towards Roth plans.

2) 403(b) Plans

If you work for a public school or a 501(c)(3) tax-exempt organization, a 403(b) is a great way to save for retirement. The non-profit organizations, such as public schools, religious organizations and nonprofit/charity companies, they are the usual customers of 403(b). Administrative costs are considerably lower in 403(b) as compared to 401(k).

Key Features

The 403(b) plan is an employer-sponsored supplemental retirement savings plan. Similar to a 401(k) plan, it allows employees to contribute on a pre-tax or (if permitted by the 403(b) plan) Roth after-tax basis. A 403(b) plan can only be sponsored by a tax-exempt organization like a school or a church.

If your employer sponsors a 403(b) plan for you, you may be able to get following valuable benefits for retirement savings.

Tax-deferred investment earnings:

The earnings in your investment are compounded (re-invested) and have the potential to grow tax-deferred. These tax-deferred earnings may grow faster than a similar taxed account because taxes are not due until withdrawn.

Ability to reduce your taxable income:

You determine the amount of your 403(b) contributions (up to IRS-defined limits) through a salary reduction agreement with your employer. Your contributions will be pre-tax, reducing your current taxable compensation.

Catch-up contributions:

If you have been a service employee for a long time or you are at least 50, you may be able to contribute beyond the general IRS limits. Thus, increasing the overall bounty.

Ability to have earnings withdrawn tax-free:

Your 403(b) plans may permit you to make Roth contributions, which are made on an after-tax basis. The earnings on Roth 403(b) accounts may be free from federal income tax if you meet certain IRS criteria when you are eligible for a distribution under the 403(b).

Employer contributions:

Depending on the 403(b)-plan design, your employer may also make a contribution to it of his or her own accord. This is usually done to give an incentive to the employees.

Investment options that you can control:

Typically, a 403(b) plan lets you choose among investment funds. They are often ranging from very conservative to aggressive growth. The more aggressive growth plans you choose, the more risk there is of them being wasted away. The plans involving conservative growth may not be the most glamorous, but they are the safest bets when it comes to losing risky investments.

Distribution Plan:

Employees can access their accounts when they have a distributable event under this plan. Amounts typically are subject to income tax when withdrawn from the plan and you may also be subject to the IRS 10% premature distribution penalty tax unless you meet one of the IRS exemptions. Special rules apply to withdrawals of Roth 403(b) amounts typically depending upon the plan.

Portability:

If you leave your job, you can leave your money in the plan, roll your 403(b) account into another employer’s eligible retirement plan, or to a traditional IRA or (if rolled directly) a Roth IRA. You also have the option of cashing out. The distribution will be subject to income tax and the 10% premature distribution penalty tax unless you meet one of the IRS exemptions.

3) 401(a) Plans

A 401(a) plan can be either a supplemental or core retirement package for employees who fit the eligibility criteria. A 401(a) plan may provide for either mandatory employee contributions or voluntary employee after-tax contributions. Meaning, unlike 401(k), in which you as an employee may decide how much contribution amount is added to it, in 401(a) only the employer reserves the right to decide upon it. Moreover, the participation is mandatory in 401(a). There is no exemption. However, a 401(a) plan does not permit employees to make 401(k) contributions simultaneously.

An employer offers a 401(a) plan to enable employees to save for a comfortable retirement. The plan documents will determine the employer contribution formula and will describe which employees are eligible to participate in the plan. Employers may also offer the 401(a) plans to attract and retain employees.

Key Features

• The employer reserves the right to determine employee eligibility to participate in the plan. The employer also reserves the right on the formula for his or her employee contributions that will be made into participant accounts.
• Depending on the 401(a) design, employees may either be required to make mandatory contributions or have the option to make after-tax contributions to the plan.
• Typically, employees will be permitted to select investment funds offered under the plan.
• Employees can access funds in their accounts when they have an event which necessitates the use of such funds. Amounts are typically subject to income tax when withdrawn.

4) 457(b) Plans

A 457(b) plan is a supplemental retirement plan for employees who meet specific suitability criteria. This plan has been created by keeping those specific criteria in mind. Typically, if your employer is a governmental entity, either state or local law, they will determine who is eligible to participate. If your employer is a tax-exempt organization, only highly valued and compensated employees as well as select management in high enough or critical enough positions, may participate in the plan.

Key Features

A 457(b) plan provides you with the ability to save for retirement. It has the following important features.

• Ability to reduce your taxable income: You determine the amount of your 457(b) contributions (which are up to IRS-defined limits) through a participation agreement with your employer. Your contributions will be pre-tax. Thus, reducing your current taxable compensation. If your employer is a governmental entity such as a school, the 457(b) plans may also permit you to contribute on a Roth after-tax basis.
• Your investment earnings grow tax-deferred: The earnings in your account are reinvested where they grow tax deferred. If your 457(b) plans are sponsored by a governmental employer, amounts typically are subject to income tax when funds are withdrawn from the plan, and not before. Special rules apply to withdrawals from a Roth 457(b) plan. If your 457(b) plans are sponsored by a nonprofit organization such as an NGO, withdrawals are once again subject to income tax when they are paid or made available to you.
• Choose from a menu of investment funds: Typically, the plan will permit employees to select investment funds offered by it. It is your duty to diversify your investments for the mix of growth and safety you feel most comfortable with.
• Portability: If you leave your job and your 457(b) retirement plans are sponsored by a governmental entity, you might be able to transfer your 457(b) account into another employer’s eligible retirement plan, whether it is a traditional IRA or Roth IRA. You also have the option to leave your money in your plan or cash out completely. Though keep it in mind, if you cash out, the distribution will be subject to income tax.

Features unique to a 457(b) plan to consider:

Catch-up contributions are unique to 457(b). Catch-up contributions mean, even if you are no longer a service employee, you may still be able to contribute beyond the general IRS limits. If you are at least at the age of 50 and your 457(b) plans are sponsored by a governmental entity, you may have another catch-up contribution available. Withdrawals from your 457(b) account (other than any rollover contributions made to a 457(b)-plan sponsored by a governmental employer) are not subject to the IRS 10% premature distribution penalty tax.