Employer-sponsored retirement plans are saving/investment
plans approved by the Internal Revenue Service (IRS) that
allow employees to place funds in a tax-sheltered account for
the purpose of funding all or part of their retirement.
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One example of an
employer-sponsored retirement plan is a 401(k) plan, which is
tax-deferred retirement plan that allow an employer to match
employee deposits into the account up to a certain amount.
Matching contributions is a very powerful incentive for
encouraging participation in an employer-sponsored retirement
savings plan. In these plans, employees choose how to distribute
their investments among the many different investment products.
401(k) A 401(k) is the most common
company-sponsored savings plan. Any business with one or more
employees can set one up. Employees can contribute up to $10,000
each year to their 401(k), and employers can choose if and how
much they want to add. However, their combined contribution
cannot exceed $30,000, or more than 15 percent of the worker's
yearly compensation.
A 401(k) allows
employees to contribute more tax-deferred money toward their
retirement than other savings options. However, 401(k) plans are
costly: Establishing and administering a plan requires the
involvement of a third-party administrator or financial
institution.
SIMPLE IRA A savings incentive match
plan (SIMPLE) IRA is a tax-deferred retirement plan for sole
proprietors or small businesses with fewer than 100 employees.
Companies that do not maintain or contribute to other retirement
plans can set up SIMPLE IRAs.
Under a SIMPLE
IRA, employees can contribute up to $6,000 per year; employers
must match the employee's contribution (up to 3 percent of the
employee's yearly compensation) or contribute an amount equal to
2 percent of the employee's salary. With the exception of
contribution limits, SIMPLE IRAs are subject to the same rules
as standard IRAs.
Profit-Sharing
Plan Profit-sharing plans, which
were initially developed to encourage hard work and loyalty,
allow companies to set aside money for employees during
profitable years. The company invests the money, and employees
only pay taxes once the money is distributed, generally upon
retirement. Profit-sharing plans are a good option for small
businesses because they offer the greatest flexibility; an
employer can contribute to the plan in profitable years and not
contribute in lean years. Profit-sharing plans are also
relatively easy to administer.
Money-Purchase
Plan Money-purchase plans are
similar to profit-sharing plans except they obligate the
employer to contribute a predetermined amount outlined in the
terms of the plan. This means a business must contribute even
when it doesn't turn a profit. Employees may contribute up to 25
percent of their annual salary or a maximum of $30,000 a year.
SEP IRA Any business that doesn't
already maintain another retirement plan can sponsor a
simplified employee pension (SEP) IRA. The plan is funded by the
employer and is easy to set up and maintain. The maximum annual
contribution for a SEP IRA is 15 percent of the employee's
yearly compensation or up to $24,000. Employers can decide each
year whether or not to contribute funds to a SEP IRA.
Keogh Plan A Keogh plan is a
tax-deferred retirement savings plan for self-employed
individuals. Although exact contribution limits depend on the
type of Keogh plan, in general a self-employed individual may
contribute a maximum of $30,000 to a Keogh plan and deduct that
amount from their taxable income.
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