Retirement plans are tax-effective methods that allow you to save money for retirement as you earn income. The various types of retirement plans vary in the way they provide tax benefits as well as their rules regarding contributions and withdrawals. Retirement plans can mainly be divided into two varieties: defined benefit plans and defined contribution plans.

• Defined benefit (pension) plans: Your employer invests money on your behalf, which you then receive in regular payments after retirement
• Defined contribution (IRA, 401k, 403b, etc) plans: You invest a portion of your paycheck into a retirement account, with the potential for your employer to match a portion or all of those contributions.
• With a defined contribution plan, a participant always has access to the funds, although taxes and penalties might apply.

Individual retirement accounts (IRAs) are available to almost anyone with a taxable income, and include traditional IRAs, Roth IRAs, and SEP IRAs.

• Traditional IRA: You contribute money every year to a tax-favored retirement account. Your contributions reduce your taxable income and grow until you withdraw it. After withdrawal, every dollar distributed from the account is subject to income taxes, and potentially a 10% penalty if taken out before age 59.5.
• Roth IRA: Contributions are made with after tax dollars, however in most instances, distributions are tax free. There are several rules needed to ensure that distributions of gains within the account are tax free, however contributions to the account can always come out tax free.
• SEP IRA: Designed for small business owners and the self-employed
• high contribution limits and immediate vesting.

401(k) and 403(b) are plans in which a percentage of each paycheck is taken out before tax and placed into an investment account. Investments within a 401k or 403b plan are generally more restricted than what is found within IRA’s.

• Traditional 401(k) and 403(b) plans: contributions are taken from the participant’s paycheck before tax and are subject to taxation when withdrawn
• Roth 401(k) and Roth 403(b) plans: allow for contributions to be made after income taxes so that if several other requirements are met, there are no taxes at the time of withdrawal during retirement
• Solo 401(k): Serves as a plan for business owners with no employees
• you can amplify your savings by contributing both as an employee and as an employer

If you have any questions about retirement plans, feel free to contact us!