A quick look at common Retirement Plans

A quick look at common Retirement Plans

August 03, 2023

A quick look at common Retirement Plans

Here's a fun fact to kick things off: Did you know that IRA is actually an acronym for Individual Retirement Arrangements, not Accounts as most people believe? Well, now you do!

Let's dive in to get to know more about these different types of retirement plans. Here, we'll aim to shed light on the alphabet soup of IRAs, 401(k)s, 403(b)s, and more, in hopefully give you a basic overview of each.

Individual Retirement Arrangements  (IRAs): These are personal retirement savings accounts. They come in two main flavors: traditional and Roth. In a traditional IRA, you put in money pre-tax, meaning you get a tax deduction now, but you pay taxes later when you withdraw the money in retirement. With a Roth IRA, you put in money after-tax, so you won't get a tax break now, but you won't have to pay taxes on your withdrawals in retirement.  A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

401(k) and Roth 401(k) Plans: These are retirement accounts offered by many employers. They work similarly to traditional IRAs - your contributions are pre-tax, and you pay taxes upon withdrawal. One key advantage is that employers often match a percentage of your contributions, essentially giving you free money!

403(b) and Roth 403(b) Plans: Think of these as the 401(k) for employees of public schools and other tax-exempt organizations. The tax advantages and contribution limits are similar to 401(k)s.

SIMPLE IRA Plans (Savings Incentive Match Plan for Employees): These are for small businesses and offer both employer and employee contributions.

SEP Plans (Simplified Employee Pension): With these, only the employer contributes to the employee's IRA. They're ideal for self-employed individuals or small businesses due to their flexibility and higher contribution limits.

SARSEP Plans (Salary Reduction Simplified Employee Pension): These are a type of SEP Plan in which employees can make pre-tax contributions through salary reductions. Note: as of 1997, no new SARSEP Plans can be established, but existing ones can continue.

Payroll Deduction IRAs: Employees set up an IRA (either a Traditional or a Roth) with a financial institution and authorize a payroll deduction for the IRA.

Profit-Sharing Plans: As the name suggests, employers can share profits with employees by contributing to their retirement savings. The amount varies based on the company's profitability.

Defined Benefit Plans: These are the "old-school" pension plans. Employers promise a specified monthly benefit at retirement, often based on salary and years of service.

Money Purchase Plans: Like defined benefit plans, but the contribution amount is fixed instead of the benefit at retirement.

Employee Stock Ownership Plans (ESOPs): These unique plans allow employees to own stock in the company. The company contributes its stock or cash to buy its stock, which can provide a significant payoff if the company does well.

Governmental Plans: These are retirement plans for government employees, including federal, state, and local levels.

457 Plans: Similar to 401(k)s, these are offered to state and local government employees, as well as some non-profit organizations..

Multiple Employer Plans (MEPs): These allow small businesses to pool together to offer retirement benefits, reducing administrative burden and costs.

Remember, this is a very basic overview of retirement planning. Retirement planning can be a complex process and each type of plan has its own set of rules, advantages, and potential drawbacks. It's always wise to consult with a Fiduciary Financial Advisor to understand which option would best suit your individual circumstances.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Written by: Anthony Owens

Copyright © 2023 Anthony Owens @ Thriving Wealth Hub.

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