Retirement benefits are extremely important; they should be a top consideration for a new job. Yet only half of the current employees understand the benefits offered to them (from the Employee Benefit Research Institute). The plan design is individualized; one company’s benefit formula may not be as generous as the other’s. It’s really important that you read the summary plan that is provided to all participants. In this blog, we discuss the top 10 retirement savings strategies.
1. Defined Contribution Plans
Since their introduction, defined contribution (DC) plans, including 401(k) s. The 401(k) plan is the most ubiquitous DC plan among employers of all sizes. Also, the similarly structured 403(b) plan is offered to employees of public schools. And certain tax-exempt organizations and the 457(b) plan are most commonly available to state governments.
2. IRA Plans
An IRA retirement plan created by the US government is to help workers save for retirement. There are several kinds of IRAs, including a traditional IRA, SEP-IRA, and SIMPLE IRA. Here’s what each is and how they differ from one another.
A traditional IRA is a tax-advantaged plan that allows you significant tax breaks while you save for retirement. Also, anyone who earns by working can contribute to the plan with pre-tax dollars. Thus, meaning any contributions are not taxable income and the IRA allows these contributions to grow tax-free. Earlier withdrawals may leave the employee subject to additional taxes in a traditional IRA.
3. Solo 401(k) Plan
Alternatively known as a Solo-k, the Solo 401(k) plan is designed for a business owner and their spouse. Because the business owner is the employer, elective deferrals can be made, plus a non-elective contribution of up to 25%. The limit for unincorporated businesses is 20%, not including catch-up contributions. To set up your plan as a Roth, you can’t do it in a SEP, but you can with a Solo-k.
Pensions are formally known as defined benefit (DB) plans and are the easiest to manage. They are fully funded by employers and provide a fixed monthly benefit to workers at retirement. They are on the endangered species list because fewer companies are offering them. A worker with an average pay of $50,000 over a 25-year career, would receive an annual pension payout of $18,750.
5. Guaranteed Income Annuities (GIAs)
GIAs are not offered by employers, and individuals can buy these annuities to create their pensions. You can buy an immediate annuity to get a monthly payment for life, but most people aren’t comfortable with this. More popular are deferred income annuities that are paid overtime with this arrangement. You can buy GIAs on an after-tax basis, in which you’ll owe tax only on the plan’s earnings.
6. Profit-sharing Plans
Some companies offer a profit-sharing plan as an incentive for them to be productive. They help boost the company’s profits and you can’t contribute to it; only the employer can. But your employer has discretion whether to contribute from year to year, and the government does insist contributions be recurring.
7. The Federal Government Plan
The Federal Employees Retirement System (FERS), offers a secure three-legged retirement-planning stool for civilian employees. All they need to do is meet certain service requirements:
A basic defined benefit plan
The Thrift Savings Plan (TSP)
Only two of these are portable. Social Security and TSP, the latter are available to members of the uniformed services. The TSP is a lot like a 401(k) plan, a bond fund, an S&P 500 index fund, and an international stock fund. On top of that, federal workers can choose from several lifecycle funds that invest in those core funds.
8. Cash-balance Plans
This is a pension plan; you’re promised a certain account balance based on contribution credits. However, a common setup for cash-balance plans is a company contribution credit of 6% of pay plus a 5% annual investment credit. The investment credits are not based on actual contribution credits, and the plan assets earn more. Also, many companies want to convert to a cash-balance plan; it allows them better control over the costs of the plan.
9. Cash-value Life Insurance Plan
Some companies offer insurance as a benefit, whole life, universal life, and variable universal life. They provide a death benefit at the same time building cash value, which supports your retirement needs. If you withdraw the cash, the premiums you paid on your cost basis are not subject to tax. However, there are similarities to the Roth tax treatment, in which you don’t get a deduction and you can get tax-free withdrawals.
10. Non-qualified Deferred Compensation Plans (NQDC)
Unless you’re a top executive, you can pretty much forget about being offered an NQDC plan. One plan looks like a 401(k) plan with salary deferrals and a company match, the other is solely funded by the employer. The catch is most often the latter one is not funded; the employer puts in writing a “mere promise to pay”.