Plans described below offer a high level overview of types of plans that may be sponsored by employers. These plans are subject to specific legal requirements and annual contribution limits.
Employer Pension Plans
A pension is a retirement plan offered by some employers. A traditional pension pays a specific monthly amount at retirement, usually based on your final wages, years of service and age. Employer pension plans are a type of Defined Benefit Plan, often referred to as “DB Plans".
Defined Contribution Plans - 401(k) or 403(b), or 457(b) governmental plan
In place of, or in addition to a pension plan, many employers today offer a defined contribution plan ("DC Plan") such as a 401(k), a 403(b) or a 457(b) governmental plan. These plans are administered by employers.
Here’s how they work:
- Contributions are deducted from your paycheck, in many cases on a pre-tax basis
- The money can be invested in stocks, bonds, mutual funds or other investments
- Your account is adjusted for earnings and losses
- If you made pre-tax contributions, you pay tax on distributions when you withdraw your funds
- If you made Roth contributions, you are not taxed on distribution if you meet the Roth requirements
- Plan terms determine when withdrawals may be made. Possible withdrawal penalty for withdrawals before age 59 ½ . Governmental 457(b) plans do not impose an early withdrawal penalty, but other withdrawal restrictions may apply.
This is a relatively new option that plan sponsors may adopt in their defined contribution plans. Under this plan, contributions are made from after-tax dollars and grow tax free. Contribution limits are higher than the Roth Individual Retirement Account (IRA) but cannot exceed the normal 401(k)/403(b) plan contribution limit.
Payroll Deduction IRA
Under a Payroll Deduction IRA, employees establish an IRA (either a Traditional or Roth IRA) with a financial institution and authorize a payroll deduction amount for it. A business of any size, even if you're self-employed, can establish a Payroll Deduction IRA program. Payroll deduction IRAs are good starter plans that encourage savings by employees before earnings go toward day-to-day expenses.
Find detailed information at www.irs.gov/retirement-plans/plan-sponsor/payroll-deduction-ira
Simple IRA’s are designed for businesses with 100 or fewer employees that want to offer a retirement plan. The business owner can choose to match up to a certain percentage of the employees’ contributions. Simple IRAs are great starter plans that encourage contributions from employees.
Learn more here www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans
Learn more about retirement planning resources for small businesses
How Do I Reduce My Administrative Costs?
Get a tax credit for 50% of your eligible startup costs. Learn more about the Retirement Plans Startup Costs Tax Credit by reviewing Employer Resources