Research suggests that roughly 40.6% of all households in the United States will run out of money during retirement. Unfortunately, this is largely due to the fact that many modern American families simply aren’t planning for retirement – at all.
However, taking the time to proactively create a financial strategy to get you to and through retirement while living comfortably is one of the best investments you can make in yourself and your personal happiness. One of the ways you can start to plan ahead is by understanding what type of retirement plans are available to you through your employer.
Many individuals will receive a pension fund that is at least in part sponsored by their employer. Because of this, employers that offer retirement plans for individuals have better success in hiring and overall employee retention. Others will have both a pension plan and a retirement savings plan, sometimes with company-matching contributions, available to them.
Whether you’re an individual wanting information on retirement plans to help you select a job opportunity, or you’re a company looking to learn more about retirement offerings, we’re here to help. Here’s a guide to company retirement plans you should know are available.
The Types of Pension Plans Employers Provide
It can be challenging to differentiate between the different types of company pension plan options. It’s important to understand how to break them down so that you can make the most informed decision.
In general, pension plans can be divided into two different categories:
Defined Benefit Plan
Defined benefit plans are retirement plans that guarantee a specified monthly benefit amount during retirement. These are the types of plans that are most commonly referred to as “pension plans”. These plans are typically overseen by investment management teams that take care of all the retirement accounts.
Defined Contribution Plan
A defined contribution plan doesn’t provide a guaranteed payout during retirement. Instead, these types of plans take contributions from both the employee and the employer. These contributions are equal to a fixed percentage of an employee’s total yearly salary.
In these plans, employees take on the most risk. Once they retire, they will receive the sum of contributions available in the account. This plan will include any investment gains or losses, which will be accounted for in the total payout at the time of retirement.
The Most Common Company Retirement Plans
Looking beyond pension plans, most employers also offer a retirement savings plan (or multiple different types of savings plans) for their employees to leverage. There are many different types of retirement plans that companies have to offer. To better understand the benefits of each type of retirement plan, we’ve made a quick guide to help you.
Remember, before choosing to invest in a retirement plan, it’s essential to speak with a wealth management team or an accountant. Consulting with a professional will help you acquire a more comprehensive understanding of what your future needs will be, in addition to what investments or savings options may or may not be available to you, depending on the plan you choose.
401k Retirement Plans
401k retirement plans are one of the most common types of retirement plans, which employers sponsor. Many for-profit companies offer employees this type of plan, especially if they are large businesses.
In these plans, employees are responsible for funding their savings account to accumulate wealth over time. However, a perk of 401k plans is that most employers will contribute a matching percentage of funds to the plan.
This advantage has made 401k’s a favorite as they give employees quite a bit of control.
With these plans, employees choose the specific investments that they want to use according to their retirement timeline, risk tolerance, and goals. In addition, the employee keeps control of their account even at the time of retirement, and if they leave and go to another employer.
Contributions to this plan are eligible for annual deductions. As of 2022, employees under 50 are able to contribute as much as $20,500 each year, tax-free. Once a person is over 50, they can contribute an additional $6,500 in “catch up” contributions as they near retirement.
It’s necessary to keep in mind, however, that these plans aren’t entirely tax-free. When you withdraw the money in retirement, you’ll be responsible for paying taxes on the money.
Roth 401k Plans
Another popular employer-sponsored retirement plan is something called a Roth 401k. A Roth 401k plan works in a very similar manner to a traditional Roth IRA plan. However, it follows the same employee limits as a 401k does when it comes to contributions.
One notable and significant distinction between Roth 401k and standard 401k plans is that, for a Roth 401k, there are no tax deductions available at the time of the contribution. While this is the case when contributing to the plan, the tax advantage may be available when you withdraw the money from the account. At that time, you may be eligible to avoid paying taxes.
For a Roth IRA, there are some guidelines to keep in mind to protect yourself from having to pay taxes on the money you’ve carefully stored away. If you are over 59.5 years old and have held the money in the account for at least five years, you’ll be able to gain access to the funds without having to pay any taxes at the time of withdrawal. Remembering these rules helps to discourage early withdrawal from employee retirement plans.
In a Roth 401k plan, employees have the option to match their employer’s contributions to the plan, but will have to put their contributions into a separate, traditional 401k account. Their limits for both plans will stay the same, and if you do have both plans, your contributions cannot be greater than the limits of the 401k plan.
Not all businesses are eligible to offer 401k plans. 401k plans are designed specifically for for-profit companies. Non-profit companies wanting to provide a retirement plan use something called a 403b plan to support their employees instead.
Hospitals, public schools, churches, and other non-profit organizations are eligible for offering these types of retirement plans. While they are different from 401k plans in name, they work in more or less the same way.
In a 403b plan, the employee funds the majority of these plans. In 2022, they are eligible for tax deductions up to $20,500 if you are under 50 years old. If you are over 50, you are allowed to contribute an additional $6,500 each year.
With a 403b plan, the employer can match a set percentage of the employee’s contributions if they choose. When the employee withdraws the money from their account, they will be required to pay all applicable taxes.
Smaller businesses may not be able to offer 401k plans to their employees. In these cases, they may choose to provide something called a Savings Incentive Match Plan for their employees or a SIMPLE plan.
A SIMPLE plan is a type of IRA plan.
In this type of plan, an employee makes contributions to their plan. Each contribution is tax-deductible. The employer makes contributions equal to as much as 3% of an employee’s annual salary. Or, they can choose to make non-elective contributions.
Just like 401k plans and 403b plans, however, SIMPLE plans have a maximum contribution amount. You can only contribute up to $13,500 a year for a SIMPLE IRA plan if you are younger than 50 years old. For people older than 50, catch up contributions are available.
A Simplified Employee Pension plan, also known as a SEP, is another excellent option for small businesses. This type of retirement plan is a straightforward plan for small businesses looking to offer this benefit to employees.
They, like SIMPLE plans, are based on IRAs. SEP-IRA plans work similarly to traditional IRA plans. They have the same distribution, investment, and rollover requirements as these types of plans. In this type of retirement account, however, there are more significant contribution limits.
With a SEP-IRA plan, the contribution limit must be equal to 25% of the compensation amount or equal to $57,000. The lesser of these two amounts will be the contribution limit for the SEP-IRA plan.
MyRA plans are the simplest type of retirement plan available to employers. They’re a no-hassle plan that makes it easy to offer retirement benefits to employees.
MyRA plans have a minimum deposit amount of $25 per employee. However, both an employee and an employer can contribute as small as $5 every pay period.
MyRA plans are an attractive option for employers because there are no costs associated with them. The government sponsors these types of plans, making them easy to administer. Plus, there are no requirements for employer contributions which is attractive to some business owners.
Just like Roth IRAs, the contributions made to this type of plan are not tax-deductible. That means that you don’t need to pay money in taxes when you withdraw them, but you will have to pay taxes at the time that you deposit the funds.
Each year, a saver can contribute as much as $6,000 if they are under 50. If they are 50 or older, their annual contribution limit increases to $7,000. Savers can deposit or withdraw money at any time without suffering any tax penalties.
However, it’s important to note that with these types of plans, the participant cannot save more than $15,000. Once the account balance reaches this total, they must roll the money into a traditional Roth IRA.
Know What to Expect From Company Retirement Plans
Having a solid understanding of company retirement plans is critical to both employers and employees. It helps both parties better understand and manage the risk associated with each type of retirement plan.
It also helps with financial planning efforts. For companies, it can help executives make more informed choices about benefits plans for employees.
For individuals, it can help them plan for the future.
If you require assistance with managing a company retirement plan or would like some guidance concerning your current retirement plan, the team at Mariaca Wealth Management can help. Contact our team, and we’ll help guide you through these plans.