A 401(k) plan is a retirement savings account that allows an employee to divert a portion of his or her salary into long-term investments. The employer may match the employee's contribution up to a limit.
A 401(k) is technically a "qualified" retirement plan, meaning it is eligible for special tax benefits under IRS guidelines. Qualified plans come in two versions. They may be either defined-contribution or defined-benefit, or pension plans. The 401(k) plan is a defined-contribution plan.1
That means that 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. After retirement, the account balance is entirely in the hands of the employee.
What Is an Individual Retirement Account (IRA)?
An individual retirement account (IRA) is a tax-advantaged investing tool that individuals use to earmark funds for retirement savings.
In most cases, contributions to traditional IRAs are tax-deductible. If someone puts $6,000 into an IRA, that person's taxable income decreases by the amount of the contribution. However, when that individual withdraws money from the account during retirement, those withdrawals are taxed at their ordinary income tax rate.
Can also be an individual retirement annuity, which is an annuity contract or an endowment contract purchased from a life insurance company. As with all IRAs, the Internal Revenue Service mandates specific eligibility and filing status requirements. A Roth IRA's main advantages are its tax structure and the additional flexibility that this tax structure provides. Also, there are fewer restrictions on the investments that can be made in the plan than many other tax-advantaged plans, and this adds somewhat to their popularity, though the investment options available depend on the trustee (or the place where the plan is established).
A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.
Self-employed individuals, such as independent contractors, freelancers, and small-business owners, can set up SEP IRAs. The acronym SEP stands for "simplified employee pension." A SEP IRA adheres to the same taxation rules for withdrawals as a traditional IRA. For 2019, SEP IRA contributions are limited to 25% of compensation or $56,000, whichever is less.7
In 2020, the limit rises to $57,000.
Business owners who set up SEP IRAs for their employees can deduct the contributions. However, company employees are not allowed to contribute to their accounts, and the IRS taxes their withdrawals as income.
The SIMPLE IRA is also intended for small businesses and self-employed individuals. The acronym SIMPLE stands for "savings incentive match plan for employees." It also follows the same taxation rules for withdrawals as a traditional IRA. Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions to their accounts, and the employer is required to make contributions as well. All the contributions are tax-deductible, potentially pushing the business or employee into a lower tax bracket.
What Is a Profit-Sharing Plan?
A profit-sharing plan is a retirement plan that gives employees a share in the profits of a company. Under this type of plan, also known as a deferred profit-sharing plan (DPSP), an employee receives a percentage of a company’s profits based on its quarterly or annual earnings. This is a great way for a business to give its employees a sense of ownership in the company, but there are typically restrictions as to when and how a person can withdraw these funds without penalties.
A 412(e) plan is a defined-benefit pension plan that is designed for small business owners in the U.S. This is a tax-qualified benefit plan, so any amount that the owner contributes to the plan becomes available immediately as a tax deduction to the company. Guaranteed annuities or a combination of annuities and life insurance are the only things that can fund the plan.
What Is a 457 Plan?
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.
What Is a 403(b) Plan?
A 403(b) plan (written variously as a 403b or 403 b plan) is a retirement account for certain employees of public schools and tax-exempt organizations. Participants include teachers, school administrators, professors, government employees, nurses, doctors, and librarians. Religious ministers may also participate in these plans. Note, however, that there's a special plan type—a 403(b)(9)—that's designed specifically for employees of religious institutions.
What Is Medicare Advantage?
Medicare Advantage is part of the Medicare program offered to senior citizens and disabled adults who qualify. Also referred to as Part C plans, Medicare Advantage plans are provided by private insurance companies instead of the federal government. They generally include the same Part A hospital, Part B medical coverage, and Part D prescription drug coverage that Medicare does, with the exception of hospice care. Anyone who joins an advantage plan still has Medicare.