Retirement Services

401(k) plan is a retirement savings account that allows an employee to divert a portion of their salary into long-term investments. The employer may match the employee's contribution up to a limit.3 A 401(k) is technically a qualified retirement plan, meaning it is eligible for special tax benefits under Internal Revenue Service (IRS) guidelines. Qualified plans come in two versions. They may be either defined contribution or defined benefit, such as a pension plan. The 401(k) plan is a defined contribution plan.  That means the available balance in the account is determined by the contributions made to the plan and the performance of the investments. The employee must make contributions to it. The employer may choose to match some portion of that contribution or not. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money. This typically happens after retirement when the account balance is entirely in the hands of the employee.

Due to the abuses of the 412(i) plan resulting in tax avoidance schemes, the Internal Revenue Service (IRS) moved the 412(i) provisions to 412(e)(3), effective for plans beginning after Dec. 31, 2007. 412(e)(3) functions similarly to 412(i), except that it is exempt from the minimum funding rule.2 According to the IRS, the requirements for 412(e)(3) are as follows:  

• Plans must be funded exclusively by the purchase of a combination of annuities and life insurance contracts or individual annuities, 
• Plan contracts must provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating in the plan, and commencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective), 
• Benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (licensed under the laws of a state to do business with the plan) to the extent premiums have been paid, 
• Premiums payable under such contracts for the plan year, and all prior plan years, have been paid before lapse or there is a reinstatement of the policy, 
• No rights under such contracts have been subject to a security interest at any time during the plan year, and 
• No policy loans are outstanding at any time during the plan year2

The term 403(b) plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.  

The 403(b) plan, which is closely related to the better-known 401(k) plan, allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits. There's also an option for the employer to match part of the employee's contribution.  

• 403(b)s are retirement savings plans that serve employees of public schools and tax-exempt organizations. 
• Contributions to 403(b) plans are made through payroll deductions. 
• The IRS limits the amount that employees can contribute to their 403(b) plans.1 
• The advantages of a 403(b) include faster vesting of funds and the ability to make additional catch-up contributions. 
• Investment choices may be more limited with a 403(b) and some accounts offer less protection from creditors than 401(k)s.

Generally speaking, 457 plans are non-qualified, tax-advantaged, deferred compensation retirement plans offered by state governments, local governments, and some nonprofit employers. Eligible participants are able to make salary deferral contributions, depositing pre-tax money that is allowed to compound without being taxed until it is withdrawn.  

• 457 plans are IRS-sanctioned, tax-advantaged employee retirement plans. 
• They are offered by state, local government, and some nonprofit employers. 
• Participants are allowed to contribute up to 100% of their salary, provided it does not exceed the applicable dollar limit for the year. 
• Any interest and earnings generated from the plan do not get taxed until the funds are withdrawn.

A traditional IRA is set up by an individual on their own behalf to save for retirement, whereas a SIMPLE IRA is set up by a small business owner on behalf of an employee (including the owner if he or she is a sole proprietor). Only the owner of a traditional IRA makes contributions to the account, whereas both the employee and the employer make contributions to a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees.

Roth IRA is a unique type of tax-free retirement account. Unlike a traditional IRA or 401k, there is no upfront income tax deduction for investing in a Roth IRA—meaning, it is a tax-free retirement. Income contributions with Roth IRA grow tax-free upon withdrawal of the money at retirement, unlike with traditional IRA or 401k where investments are not tax-free but tax-deferred until the withdrawal. Just as with other types of retirement plans, there are income limits for Roth IRA. But there are no age limits or employer plan limits. These Roth IRA income limits are determined by the Internal Revenue Service and income limits adjust over time. 

 Income Limits for Roth IRA 

There are income limits on who can contribute to Roth IRA distributions. Individuals and couples with very high incomes are limited from Roth IRA distributions, because the tax-free withdrawal benefit in Roth IRA distributions exists to encourage personal savings and are limited only to those who need it most, not as a tax barrier for the wealthy. While there are indeed income limits for contributions, there are no income limits for Roth IRA conversions. Additionally, Roth IRA distributions is most beneficial if present tax rate is lower than when you take the money from the account in the future.  

A Tax-Free Retirement 

In a qualified Roth distributions program, a participant can choose to have all or part of his elective deferrals, made to a separate designated Roth account. Such “designated Roth distributions” are made on an after-tax basis. Growth in the designated Roth account is tax-free and qualified distributions are also tax-free and excluded from gross income.  A great deal to do with Roth IRA is to combine it with a 401k, traditional IRA, SIMPLE IRA or SEP IRA. These types of IRA provide you tax-deferral but if you withdraw the money before retirement, you will be charged of income taxes. But with Roth IRA, you don’t get the upfront tax deduction but you don’t pay taxes on the money when you withdraw it and even withdraw your contributions before retirement without penalty.

Simplified employee pension (SEP), or business owner retirement plan, plan provides a significant source of income at retirement by allowing business owner to set aside money in retirement accounts for business owner and their employees as well as self-employed. A SEP plan provides employers with a simplified method to make contributions toward the employees’ retirement and, if self-employed, their own retirement. Under a simplified employee pension, a business owner contributes directly to traditional individual retirement account (IRA) for all employees.  

Why Avail of Simplified Employee Pension IRA? 

A simplified employee pension IRA does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25% of each employee’s pay. Contributions to a SEP IRA are tax deductible and business owner pays no taxes on the earnings on the investments.  The business owner is allowed a tax deduction for plan contributions, which are made to each eligible employee’s SEP IRA plan on a discretionary basis.  Employees do not pay taxes on their contributions. However, distribution plus any earnings are taxed. 

Self-Employed Retirement Plan 

If you’re self-employed or own a small business, you can also acquire SEP IRA. It is the most basic of several self-employed retirement plan options for small businesses, but it still provides core benefits for both business owner, employee, and self-employed.  An employee, business owner, or self-employed eligible to participate in SEP IRA plan must establish a traditional individual retirement account to which the employer will deposit SEP IRA contributions. Some financial institutions require the traditional individual retirement account to be labeled as simplified employee pension IRA before they allow the account to receive simplified employee pension IRA contributions. Others allow contributions to be deposited to a traditional individual retirement account regardless of whether the IRA is labeled as an simplified employee pension IRA.