There are a lot of tax-advantaged retirement plans to help people, and the most common ones are the following:
- Individual retirement plans such as Traditional IRAs, Roth IRAs, Spousal IRAs, myRAs, and rollover IRAs
- Employer-sponsored retirement plans such as 401(k)s, Roth 401(k)s, 403(b)s, 457(b)s, and Thrift Savings Plans
- Retirement plans for small business owners and the self-employed such as SEP IRAs, Solo 401(k)s, Solo Roth 401(k)s, SIMPLE IRAs, payroll deduction IRAs, and profit sharing.
We’ll talk more on future articles about these types of retirement plans, but what we’re going to focus on right now is the 2nd option: Employer-Sponsored Plans.
If you’re a new employee at any company, the Human Resource department covers your orientation. You’ll be asked to sign a pile of paperwork so you can begin working and this is where you need to pay close attention.
There may be significant information regarding your workplace retirement plan that you need to take note of.
There are two main types of employer-sponsored plans: Defined Benefit Plans and Defined Contribution Plans.
To help you understand how Defined Benefit Plans work, here’s an example:
In the past, some companies guaranteed its workers a set benefit in retirement, based on their years of service and average salary. The company will put money into a single retirement pool, and the pension plan will invest it. This is in hopes of earning enough to make good on its promise.
That is how Defined Benefit Plans worked. In recent times however, you will find that employers will make annual contributions to a retirement plan based on a similar formula, but without any guarantee of benefits provided in retirement!
For Defined Contribution Plans, employers will set up plans for employees to contribute to an individual account, usually through deducting their payroll. A common example is a 401(k). If you see the words “company match” in your benefits paperwork, that means you are provided an employer-sponsored retirement plan in which the company contributes to your account based on your personal contributions. The contribution level may even be a dollar-for-dollar match up.
Advantages
- Your employer may match a portion of your contribution
- 401(k) contribution limits are higher than IRAs’
- Employee contributions to non-Roth plans reduce your taxable income for the year
- Roth 401(k) withdrawals are tax-free in retirement
- You gain control of your investments in participant-directed plans
Disadvantages
- Investment choices are limited to certain funds
- New employees have a waiting period before they can start contributions
- Employer contributions can be subject to a vesting schedule
- You’ll owe taxes on the withdrawals you make in retirement for non-Roth plans.
- No promise of benefits provided in retirement for some defined benefit plans
Fortunately, there are third party administrators who can help you with your retirement plans. Here at Prenger & Profitt, we ensure that you stay compliant in whatever form you are required to file, and guide you in the process to build the retirement plan that is the best fit for YOU.
Please contact us for a consultation 🙂 And best of luck in your new ventures!
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