Types of Retirement Plans

Planning for retirement ensures that people are not stranded on account of lack of finances at a later date. Some retirement plans are sponsored by employers while other plans are ideal for self employed individuals.

Types of Retirement Plans - Employer Sponsored Retirement Plans

SEP (Simplified Employee Pension ): This plan is appropriate for small business undertakings with less than 25 employees. Self employed people, who desire a retirement plan that can be administered with less paperwork and minimal IRS reporting and disclosure, can also opt for this plan. The vesting schedule for this plan is immediate. Any employee who is over 21 years of age and has been with the firm for three of the preceding five years is eligible to receive contributions. The employee isn't expected to contribute. Employer contributions are tax deductible and the employer can decide on the amount of contributions. For the year 2009, an employer can contribute the minimum of 25% of employee compensation or $49,000.

SIMPLE IRA: This retirement plan is ideal for employers managing a workforce of less than 100 employees. Employee contribution isn't mandatory. The employer has to contribute regardless of whether the employee contributes. The employer can choose to make matching or non-elective contributions. For additional details, regarding contributions, the reader may refer to the article titled, "Table of SIMPLE IRA Contribution Limits".

401(k) plans: In case of company 401(k) plans, employee contributions grow tax deferred and there are strict penalties for early withdrawal. Companies generally offer one of the following 401(k) plans: Traditional 401(k), Safe harbor 401(k) or SIMPLE 401(k) plan. Some companies also offer a Roth 401(k) plan that allows the participants to make either a pre-tax or an after tax salary deferral contribution. The employee contribution limits for all the 401(k) plans is the same. For the year 2009, the maximum annual 401(k) contribution limits for employees over 21 but less than 50 years of age, has been set at $16,500. People over the age of 50 are allowed to contribute a maximum of $5,500 as catch-up contribution.

In case of traditional 401(k) plans, employee salary deferrals are optional but subject to non-discrimination tests in order to ensure that the plan does not benefit only highly compensated employees. The employer may choose to match employee elective deferrals or/and make a discretionary profit sharing contribution.

In case of Safe harbor 401(k) plans, employee salary elective deferral contributions are not subject to non-discrimination tests but employer contributions are mandatory. Employer contributions can be matching or non-elective.

A SIMPLE 401(k) plan is similar to a Safe harbor 401(k) plan. The employer is expected to make fully vested annual contributions. Unlike Traditional 401(k) plans, the SIMPLE 401(k) plan is not subject to non-discrimination tests. This plan is suitable for business units employing fewer than 100 employees. For both traditional and Safe harbor 401(k) plans, the number of employees is not a constraint.

Types of Retirement Plans - Not Employment Based

IRAs or Individual retirement accounts can be of the following types: Roth IRA or Traditional IRA. In case of a Traditional IRA, a person makes pre-tax contributions that grow tax deferred until retirement. In case of a Roth IRA, a person makes after tax contributions. The article,"How Does a Roth IRA Work," may help one choose between a Roth IRA and a Traditional IRA.

One should consciously make an effort and save for retirement so that one can enjoy the golden years without having to worry about finances.