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What are the types of Retirement Plans?
Where do you want to go for retirement? Do you have a plan to get you there? Individual retirements plans and defined contribution retirement plans are two main types of retirement plans. These are some tools to consider in your retirement quest.
Individual Retirement Plans and Features
Individual retirement plans provide tax advantage for retirement savings for individual. These plans provide a high level of flexibility. You can choose the type of account, investment, and financial institution.
Traditional Individual Retirement Arrangement (IRA)
- Known as Traditional IRAs
- Contributions are not subject to tax
- Investment earnings accumulate tax-deferred
- Taxes are paid in the year the retirement benefit is received
- Taxes are paid on contributions while earnings from savings
- Investments grow tax-free.
- Withdrawals (subject to certain rules) are not taxed at all
Simplified Employee Pension (SEP)
- Available to employers of any size
- Voluntary tax deductible contributions to Traditional IRAs
Savings Incentive Match Plan for Employees (SIMPLE)
- Available to small employers
- Employers can match participating employees’ contributions or contribute a fixed percentage of all eligible employees’ pay
Defined Contribution Retirement Plans
Defined contribution retirement plans provide tax advantage for retirement savings for individual and corporations. Corporations sponsor these plans and control the investment and financial institution.
- Plan where employees have individual accounts
- The employee, employer, or both make pre-tax contributions
- Benefits are based on contributions and investment returns (gains and losses) on the accounts
- Plan designed for public education and tax-exempt entities
- Both the plan sponsor and employees can make pre-tax contributions
- Plan normally open to all employees working for a State or local government
- Both the plan sponsor and participants are permitted to make pre-tax contributions
Due to the lack of flexibility associated with the defined contribution retirement plans, many individual start a Rollover IRA in order to increase flexibility. Although there are limitations associated with rollover, it can make financial sense.
Moving cash or assets out of a retirement plan before the rules permit it will result in an early withdrawal. Early withdrawals are subject to ordinary income tax plus a penalty. When you take an early withdrawal from your retirement plan and contribute it to another retirement plan, the contribution into the new retirement plan is called a rollover contribution. A Rollover IRA allows you to have a tax free distribution if you move cash or assets into another qualified retirement plan.