Choosing a Retirement Plan | Your Options Staff Profile Picture
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Have you begun planning for your retirement? Statista reports that 60% of Americans plan to rely on Social Security as their main source of income during retirement. However, they also note that 77% of Americans have a 401(k) plan, meaning most Americans do not expect Social Security to cover the total costs of their post-retirement life. When planning for the future, most people rely on a combination of plans to support themselves during retirement.

Contributing to a retirement fund is the most important step in ensuring you and your family are provided for when you retire. Your plan choice will affect when and how much you can withdraw from your retirement savings. However, many people need help choosing the right retirement plan and how much to contribute. With the help of a financial advisor, you can start planning for retirement today by selecting the right type of retirement plan for you.

Types of Retirement Plans

You are not alone if you are overwhelmed by all the choices of potential retirement plans. There are seemingly endless variables to consider, including the percentage of employer/employee contributions, when contributions are taxed, and if retirement plans can be combined. It is important to carefully review each type to make sure you are making the most of your retirement plan(s) and investments. While many of these retirement plans may appear similar at first glance, be sure to weigh the pros and cons of each option.

Individual Retirement Arrangements (IRAs)

An IRA allows retirees to contribute tax-deferred investments over time. A traditional IRA enables contributors to deduct their contributions (either partially or fully) from their yearly taxes. However, you will pay taxes on these contributions when they are withdrawn; that being said, if you are in a lower tax bracket in your retirement than you were while employed, withdrawals will be taxed at a lower rate.

Roth IRAs

Unlike with a traditional IRA plan, contributions to Roth IRAs are taxed. Based on your filing status and income, your contributions to your Roth IRA may also be limited. The main con of a Roth IRA is that you do not enjoy the tax-free contributions as you would with a traditional IRA, but qualified distributions are tax-free. For example, if you withdraw from a Roth IRA that has been established for at least five years, your withdrawal is both tax and penalty-free. Therefore, while you will pay taxes on your contributions throughout your lifetime, you can enjoy tax-free withdrawals during retirement. 

401(k) Plans

When most people think of retirement plans, they think of 401(k)s. There is a valid reason for this. 401(k) plans are the most common retirement option for private businesses. A 401(k) plan is easy to set up and manage, has high contribution limits, and, most importantly, your employer matches all employee contributions. However, it is also important to keep in mind that you may have limited investment options, and your employer’s contributions may not become accessible for several years. Employees in all businesses (except federal and state governmental agencies) are eligible to participate in 401(k) plans.

SIMPLE 401(k) Plans

This type of retirement plan is designed for business owners with 100 or fewer employees. With a SIMPLE 401(k), employers must make a matching contribution of each employee’s salary (up to 3%) or make non-elective contributions on eligible employees’ pay (at 2%). Employees, however, may elect to defer contributions. If you are interested in other retirement plans, however, the SIMPLE 401(k) option is not for you– SIMPLE 401(k)s must be the employee’s sole retirement plan. 

403(b) Plans

A 403(b) plan is a tax-sheltered annuity available for workers at public schools and other 501(c)(3) organizations. For example, if you are a teacher, librarian, professor, school nurse, or government employee, you are eligible to participate in a 403(b) retirement plan. Both employers and employees can contribute to the account. In many ways, 403(b) plans are similar to 401(k) plans. For example, 403(b) plans also allow employees to defer a portion of their salary without being taxed. However, compared to 401(k) plans, 403(b) plans may have fewer investment opportunities.

SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)

Similarly to SIMPLE 401(k) plans, SIMPLE IRA plans are ideal for small businesses. Under a SIMPLE IRA plan, employees can choose to deduct their retirement savings from their salary. The employer can then contribute 2% or match up to 3% of the employee's compensation. To qualify for a SIMPLE IRA plan, employees must have earned $5,000 or more from their employer in at least two preceding years. With a SIMPLE IRA plan, employees have a wide variety of investment options in stocks, bonds, and mutual funds.  

SEP Plans (Simplified Employee Pension)

A SEP plan differs from other retirement plans as it is solely set up and funded by the employer. Employers’ contributions are discretionary and amount to 25% of the employee’s compensation. Contributions are tax-deductible, and growth on investments are tax-deferred. Since SEP plans require employers to contribute an equal percentage of compensation to SEP plans as their own, these retirement plans are best for self-employed or small business owners.

SARSEP Plans (Salary Reduction Simplified Employee Pension)

A SARSEP plan is a type of SEP plan set up before 1997. New SARSEP plans can no longer be created. However, if your employer set up a SARSEP plan prior to this date, there is a chance you could be enrolled in a SARSEP plan even if your hiring took place after this date. The main difference between a SARSEP and a newer SEP plan is that employees have the option to contribute to SARSEP retirement plans. Like 401(k)s, there are contribution limits to SARSEP plans. 

Payroll Deduction IRAs

A payroll deduction IRA is set up by employers through a financial institution. Employeess’ contributions to this IRA are deducted from their payroll. Payroll deduction IRAs may work as either a traditional or Roth IRA. Many employers who cannot afford to offer retirement plans to their employees may encourage payroll deduction IRAs to ensure their employees are prepared for retirement. Employees can save on administrative costs because payroll deduction IRAs are not structured like a traditional corporate retirement plan. Of all the IRA options, payroll deduction IRAs are often noted as a simple and low-cost option for employees and employers.

Profit-Sharing Plans

With a profit-sharing plan, employers make discretionary contributions based on company profits. However, businesses can also contribute even when the business does not see profits. Profit-sharing plans utilize a set formula to determine how your employer’s contributions are divided among employees. The flexibility of this type of retirement plan may be attractive to employers, but higher administrative costs and disparity in compensation could be major cons for employees. Profit-sharing plans are often added to 401(k) plans. Businesses of any type or size can utilize profit-sharing retirement plans. 

Defined Benefit Plans

Employees are guaranteed a pre-established benefit upon retirement with a defined benefit plan. Retirement benefits are calculated based on factors like an employee’s current salary and length of employment. Generally, companies utilize an outside investment manager to implement a set formula for all eligible employees. Unlike defined contribution plans, employers can contribute significantly more per year (and deduct these contributions from their taxes). For employees, the main benefits of defined benefit plans are that you can invest in other retirement plans alongside your defined benefit plan, and your employer can’t retroactively alter the benefits outlined in your plan. However, in most cases, employees must take their benefits as a lump sum or lifetime annuity rather than individual withdrawals. 

Money Purchase Plans

Unlike some retirement plans with optional contributions, employers must make yearly contributions to money purchase plans. On the other hand, employees are prohibited from contributing to these plans (though they may opt to contribute to other retirement saving plans). With money purchase plans, the required contribution percentage is defined in the initial agreement. If your employer offers a high contribution percentage, this retirement plan option may be your best choice. Money purchase plans function similarly to retirement pensions. However, withdrawal from money purchase plans pre-retirement could result in penalty fees.    

Employee Stock Ownership Plans (ESOPs)

Employee Stock Ownership Plans allow employees to invest primarily in qualifying employer securities. This means that employees of the business have a vested interest in the company’s shares of stock. This type of retirement plan is often appealing to employers because it is a great motivator for employees: if the business does not succeed, it will ultimately affect their retirement. While this choice of retirement plan has risks, there is also the possibility of higher compensation if the company remains in good standing throughout your employment.

Governmental Plans

Employees of a United States government agency, a state government agency, or an Indian tribal government qualify for governmental retirement plans. Federal employees often participate in the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS). Additionally, federal employees may enroll in the Thrift Savings Plan (TSP). There are many types of governmental retirement plans, including 403(b), 457, and grandfathered 401(k) plans (governmental agencies no longer utilize 401(k) retirement plans). 

457 Plans

If you work at a state or local government entity, a 457 plan may be the right plan for you. Government and tax-exempt organizations are the only organizations eligible for 457 plans. Contributions to these plans are tax-deferred, and the earnings on retirement assets are tax-free. There are two main types of 457 plans: governmental 457 plans and “top hat” 457 plans. Governmental 457 plans are available to all government employees, while “top hat” 457 plans are available only to high earners in nonprofit charities and hospitals. While there are limits to 457 plan contributions, you may choose to take advantage of “catch-up” contributions which increase the total allowed contribution amount. Additionally, your 457 plan can incorporate designated Roth IRA contributions.

Multiple Employer Plans

Multiple employer plans comprise at least two unrelated businesses that have pooled their resources together to establish a retirement savings plan. Multiple employer plans can be either defined-benefit or defined-contribution plans. These plans were created to help small businesses without the necessary infrastructure to support a retirement plan to provide retirement benefits for their employees by combining resources with other employers. Therefore, a multiple-employer plan may benefit employers and employees at a small business.

How a Financial Advisor Can Help

Choosing a retirement plan can bring up a storm of anxiety and uncertainty. How much should I save for retirement? How much money do I need to retire at 67? Should I participate in multiple retirement plans? Are my retirement investments on track? What type of retirement plan is right for me and my family? 

A financial advisor can help you effectively plan your finances and prepare for retirement. Financial advisors have the necessary skills and experience to help you make informed decisions for your future by taking action in the present. Some of the ways a financial advisor will help you reach your retirement goals include:

  • Tracking your contributions to see if you are currently on track to retire 

  • If you are not on track, helping you take further action to ensure you meet your contribution goals 

  • Evaluating your current investment strategy 

  • Assisting you in navigating complex investments

  • Explaining how changes in the market will impact your retirement plan

  • Understanding the role of insurance in your retirement plan

  • Helping you review the pros and cons of different types of retirement plans to choose the best option for you and your family.

Of course, the quality of advice you receive depends on the skills, experience, and expertise of the financial advisor in question. If you have not yet consulted with a financial professional to review your retirement options, now is the time to begin your search. Finding an experienced financial advisor is simple when using’s directory of financial advisors. Using this tool, you can easily search for top-ranked financial advisors in your area.

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