Retirement Planning

There are two basic categories of retirement plans:

  • Defined Benefit Plan: A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. These types of plans, also referred to Pensions, are expensive for the employer. Many companies have eliminated these types of plans in favor of 401k plans.
  • Defined Contribution Plan: A retirement plan that’s typically tax-deferred, like a 401k or a 403b, in which employees contribute a fixed amount or a percentage of their paychecks in an account that is intended to fund their retirement. The employer may match a portion of employee contributions as an added benefit to help retain and attract top talent. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties. The employer is known as the sponsor. The plan administrator is usually a mutual fund company, brokerage, or an insurance company.

Below are some of the most common types of retirement plans available:

401K PLAN

  • Offered through employers.
  • Contributions are tax-deductible.
  • IRS 10% Penalty for withdrawals prior to age 59 1⁄2.
  • Required Minimum Distributions at age 72 or 50% Excise Tax applies.
  • Distributions are taxed as Ordinary Income Tax rates.
  • Some plans offer 401k loans.
  • For elective deferrals, you may contribute up to $19,000 in 2019, increasing to $21,000 if you are age 50 or older.
  • For defined contributions, you may contribute up to $56,000 in 2019.
A graph showing poor performance of a 401K plan over a year.

INDIVIDUAL RETIREMENT ACCOUNTS (IRA)

  • Sometimes referred to as a Traditional IRA.
  • Contributions are tax-deductible.
  • Contribution eligibility not limited by your income.
  • IRS 10% Penalty for withdrawals prior to age 59 1⁄2.
  • Required Minimum Distributions at age 72 or 50% Excise Tax applies.
  • Distributions are taxed as Ordinary Income Tax rates.
  • You may contribute up to $6,000 in 2019, increasing to $7,000 if you are age 50 or older.

ROTH IRA

  • Contributions are not tax-deductible.
  • No 10% Penalty for withdrawals prior to age 59 1⁄2 on the Cost Basis.
  • Withdrawals of any realized gains prior to age 59 1⁄2 are subject to an IRS 10% Penalty.
  • Contribution eligibility limited by your income.
  • No Required Minimum Distributions or Excise Tax.
  • Distributions are income tax-free.
  • You may contribute up to $6,000 in 2019, increasing to $7,000 if you are age 50 or older.
cropped view of senior couple showing thumb up sign while holding envelope with ‘roth ira’ lettering

ROTH 401K

  • Offered through some employers but not very common.
  • Contributions are not tax-deductible.
  • No 10% Penalty for withdrawals prior to age 59 1⁄2 on the Cost Basis.
  • Withdrawals of any realized gains prior to age 59 1⁄2 are subject to an IRS 10% Penalty.
  • Contribution eligibility limited by your Modified Adhusted Gross Income (MAGI). Phaseouts begin at MAGIs of $122,000 for single filers in 2019, and you can’t contribute if your MAGI tops $137,000. Limits for married taxpayers filing joint returns increase to $193.000 and $203,000.
  • No Required Minimum Distributions or Excise Tax.
  • Distributions are income tax-free.
  • You may contribute up to $6,000 in 2019, increasing to $7,000 if you are age 50 or older.

SIMPLE IRA

  • Acronym for “Savings Incentive Match Plan for Employees”.
  • Designed for small businesses with 100 or fewer employees.
  • The Maximum employer match is $13,000 on the first 3% of employee deferred compensation.
  • Employers can provide a matching contribution.
  • Contributions are tax-deductible.
  • Contribution eligibility not limited by your income.
  • Distributions taken within two years of opening can result in a 25% Penalty.
  • 10% Penalty for withdrawals prior to age 59 1⁄2.
  • Required Minimum Distributions at age 72 or 50% Excise Tax applies.
  • You cannot borrow from a SIMPLE IRA.
  • Distributions are taxed as Ordinary Income Tax rates.
  • You may contribute up to $13,000 in 2019, increasing to $16,000 if you are age 50 or older.

SEP IRA

  • Acronym for “Simplified Employee Pension” IRA.
  • Designed for an employer or self-employed individual.
  • Employers can provide a matching contribution.
  • Contributions are tax-deductible by the employer. Employees cannot contribute.
  • Contributions made by the employer are 100% vested to the employee.
  • Contribution eligibility not limited by your income.
  • 10% Penalty for withdrawals prior to age 59 1⁄2.
  • Required Minimum Distributions at age 72 or 50% Excise Tax applies.
  • Distributions are taxed as Ordinary Income Tax rates.
  • In 2019, you may contribute up to $56,000 or 25% of income – whichever is less.
Piggy bank on money concept for business finance, investment, saving or retirement fund

403B / TAX-SHELTERED ANNUITY

  • Also referred to as a Tax-Sheltered Annuity (TSA).
  • Specific to public schools and other tax-exempt organizations.
  • Employers can provide a matching contribution.
  • Contributions are tax-deductible.
  • A 403b is an annuity contract.
  • Contribution eligibility not limited by your income.
  • 10% Penalty for withdrawals prior to age 59 1⁄2.
  • Required Minimum Distributions at age 72 or 50% Excise Tax applies.
  • Distributions are taxed as Ordinary Income Tax rates.

Employer-sponsored Defined Contribution Plans such as the 401k and 403b are increasing in popularity, however very few people truly understand how these vehicles work. Furthermore, participants rarely understand the tax implications of such plans. Many Retirement Plans can be rolled over from one type to another, however that is not always the case. Refer to the below Rollover Chart to see how what is allowed.