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Types of Retirement Plans: Which Ones Apply to You?

Retirement Planning
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Thinking about ways to keep funds available to live on when you're no longer working? You're probably already familiar with 401(k) plans. There are many types of retirement plans to choose from, however — though your choices are primarily dictated by your place of work. As most people wind up working for a variety of employers while saving over the course of a career, it can be useful to know the range of possible retirement plans.

Individual Retirement Accounts

No matter where you work, you can open an individual retirement account (IRA) as long as you have some earned income (as opposed to investment income) to put in it. You can maintain an IRA with just about any kind of financial services company. For 2019, annual contribution limits are $6,000 for both traditional and Roth IRAs — if you're 50 or older, the limit is $7,000. IRAs are set up and financed independently of employer involvement.

With a standard IRA, depending on your income level and your participation in an employer retirement fund, you might be able to take a tax deduction for your contribution and only pay taxes on your IRA accumulations when you start making withdrawals in retirement. With the Roth IRA, you don't take a tax deduction at the front end, but pay no taxes on funds you take out at retirement (assuming those funds are part of an eligible distribution).

Private-Sector Employees

If you're self-employed, there are retirement plans for you in addition to the IRA. One available plan is the simplified employee pension (SEP) IRA. For 2019, you can put up to 25 percent of your net self-employment income in an SEP IRA — up to $56,000.

If you aren't self-employed but work for a small employer, you might still have access to an SEP IRA plan. They can be attractive to some small employers because they generally involve less red tape than 401(k) plans. If you're an employee, however, only your employer can put money in an SEP for you, and they must contribute the same percentage of your income as they contribute of their income.

One of the other types of retirement plans for small employers is the SIMPLE IRA. Companies with up to 100 employees can set up a SIMPLE IRA. Like the SEP, these are simpler to administer than a 401(k) type of plan. Contribution limits are lower in the SIMPLE plan, however. For 2019, employee contributions cannot exceed $13,000, or $16,000 for the 50-and-above crowd.

Public-Sector & Nonprofit Employees

If you work for a state or local government, there's a fair chance you're covered either by a 457(b) plan or a defined benefit (DB) pension. The 457(b) plan takes its name from the relevant section of the tax code. It is essentially the government version of the private-sector 401(k) plan. And like 401(k)s, 457(b) plans can accommodate pretax contributions or the Roth after-tax contribution model.

A DB pension is a classic kind of retirement plan that's now rare in the private sector but still common in the public sector (including school systems). These plans are often run by an entity called a public employee retirement system, or PERS. Some of them oversee multiple pensions for different government entities, such as municipalities, within a single state.

If you're covered by a traditional DB plan, your benefit at retirement is defined by a formula (hence the name). That formula is based on a combination of years of service and your pay towards the end of your career.

Variations on the classic DB plan have sprouted up in recent years, including the cash-balance plan, which is a defined benefit plan that specifies both the contribution to be credited to each participant and the investment earnings to be credited based on employer contributions.

Each participant has an account that resembles those in a 401(k) or profit sharing plan, and participant accounts grow annually in two ways: The company contribution — a percentage of pay or a flat dollar amount — is determined by a formula specified in the plan document. There's also an annual interest credit. The rate of return is guaranteed and is independent of the plan's investment performance. When participants terminate employment, they are eligible to receive the vested portion of their account balances.

People who work in the educational and nonprofit sectors may be covered by a 403(b) plan, which is essentially the equivalent of a 401(k) plan.

As you can see, there are many different ways that people can save for retirement. Your employer can give you all the information you need about your options in the workplace, and financial companies can help fill you in on IRAs. But as you consider the various alternatives, don't lose sight of the bigger question: How much will you need to contribute to a retirement plan in order to have enough money to retire when you want to? A qualified financial representative can help you grapple with that question.

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