What are they?

Retirement plans are plans used by individuals and to help achieve income at retirement.

How are they used?

Different types of retirement plans may be helpful to you for your retirement planning. They are also offered as part of employee benefit packages to attract and retain top talent.

What are the benefits?

There is a wide spectrum of defined contribution 401(k), defined benefit, and non-qualified deferred compensation plans to help participants prepare for retirement. 

If you’re looking for ways to save for retirement on your own, or if you’d like to add to the benefits of your employer’s plan, individual retirement plans, or IRAs, are the best place to start.

IRA’s were established by Congress as a way to help individuals save for retirement on their own. Until a few years ago, there was just one type of IRA. Today, there are two: the traditional IRA and the Roth. Each one functions a little differently and includes different benefits, so read on…and find out which one might better fit your situation.

Retirement plans play a crucial role in providing a source of income in our later years. We've all seen or heard about "the three-legged stool" that shows Social Security, our personal lifetime savings, and company retirement plans as the triad from which we will draw the funds to pay for our expenses after we retire.

Nonqualified Retirement Plan A nonqualified retirement plan is one that does not meet the requirements of the IRC or ERISA. These plans may be discriminatory in their application and are typically used to provide deferred compensation to key personnel. Because these plans allow a broader flexibility to the employer, they do not receive the same favorable tax treatment as that permitted qualified plans

Defined Benefit Retirement Plan A defined benefit plan is the traditional company pension plan. It is so called because the ultimate retirement benefit is definite and determinable as a dollar amount or as a percentage of wages. To determine these amounts, defined benefit plans usually base the benefit calculation on a combination of years of employment, wages, and/or age. These plans are funded entirely by the employer, and the responsibility for the payment of the benefit and all risk on monies invested to fund that benefit rests with the employer.

Defined Contribution Retirement Plan A defined contribution plan is a qualified retirement plan in which the contribution is defined, but the ultimate benefit to be paid is not. In such plans, each participant has an individual account. The benefit at retirement depends on the amounts contributed and on the investment performance of that account through the years. In such plans, the investment risk may rest solely with the employee because of the opportunity to choose from a number of investment options. These plans take many forms and are known by various names such as money purchase, profit sharing, 401(k), or 403(b) plans.

Simplified Employee Pension (SEP) A SEP is a retirement plan designed for self-employed persons, partnerships, sole proprietors, independent contractors, and owner-employees of an unincorporated trade or business; however, it may be set up by any type of business. A SEP is an easy method for a small employer to establish a retirement plan for employees without the complex administration and expense found in qualified retirement plans. In fact, an employer may establish a SEP only if that employer has no qualified retirement plan in effect.

Savings Incentive Match Plan for Employees (SIMPLE) Established by the Small Business Protection Act of 1996, a SIMPLE may be set up by employers who have no other retirement plan and who have 100 or fewer employees with at least $5,000 in compensation for the previous year. SIMPLE plans are the replacement for the SARSEP plans discussed above. They may be structured as an IRA or as a 401(k) plan. In 2001, employees may defer any percentage of compensation up to $6,500 per year to the SIMPLE, and the employer is required to make a matching contribution of up to 3% of the employee's pay based on that election. The employer may reduce the maximum matching percentage in any two years out of five. Alternatively, the employer may establish a uniform 2% of salary contribution per year for all eligible employees regardless of whether they contribute to the SIMPLE or not.

There are 11 types of IRAs:

An Individual Retirement Account either a traditional or Roth IRA set up with a financial institution like a bank, broker, or mutual fund in which contributions may be invested in many types of securities such as stocks, bonds, money markets, CDs, etc.

An Individual Retirement Annuity is either a traditional or Roth IRA set up with a life insurance company through the purchase of a special annuity contract.
An Employer and Employee Association Trust Account, or Group IRA, is a traditional IRA set up by employers, unions, and other employee associations for employees or members.
A Simplified Employee Pension (SEP-IRA) is a traditional IRA set up by an employer for a firm's employees. An employer may contribute up to $30,000 or 15% of an employee's compensation annually to each employee's IRA. (See SEP)
A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a traditional IRA set up by a small employer for a firm's employees. In 2001, an employee may contribute up to $6,500 per year to these IRAs. This contribution limit increases each year through 2005, when it will reach $10,000. In 2006 and later years, the allowable contribution will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed. The employer sponsoring the SIMPLE will also make a matching contribution based on a percentage of the employee's pay. (See SIMPLE)
A Spousal IRA is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than the maximum allowable annual contribution limit in annual compensation. The couple must file a joint tax return for the year of contribution. The working spouse may contribute up to the maximum allowable annual contribution limit per year to both the Spousal IRA and to his or her own IRA as well.
A Rollover (Conduit) IRA is a traditional IRA set up by an individual to receive a distribution from a qualified retirement plan. Distributions transferred to a rollover IRA are not subject to any contribution limits. Additionally, the distribution may be eligible for subsequent transfer into a qualified retirement plan available through a new employer. To retain this eligibility through December 31, 2001, the IRA must be composed solely of the original distribution and earnings (i.e., no other contributions or rollovers may be added to or mingled with the IRA), and the new employer's plan must allow the rollover. After January 1, 2002, commingling of conduit IRA money with other IRA or qualified retirement plan money is permitted, and the mixing of such monies will have no impact on the ability to transfer those IRAs to a new employer's retirement plan.
An Inherited IRA  is either a traditional or a Roth IRA acquired by a beneficiary who is not the spouse of a deceased IRA owner. Special rules apply to an inherited IRA. A tax deduction is not allowed for contributions to this IRA, a rollover to or from another IRA owned by the heir is not permitted, and the proceeds must be distributed and taxed within a specific period as established by the Internal Revenue Code. When the owner dies, the beneficiary must receive distribution of the inherited IRA by December 31 of the fifth year following the owner's death. Alternatively, the IRA may be paid as an annuity or in installments payable over a period not extending beyond the beneficiary's life expectancy. If the owner dies without naming an IRA beneficiary but before taking minimum required distributions (MRD) at age 70 1/2, then the IRA would have to be paid out to the deceased's estate by December 31 of the fifth year following the year of death. If the owner dies without naming a beneficiary but after MRDs have begun, then the account may be paid to the estate over time, based on the deceased's life expectancy as calculated in the year of death. That life expectancy would be reduced by one in each subsequent year to calculate that year's payout.
An Education IRA (EIRA), now called the Coverdell Education Savings Account (ESA), is an account established to provide funds that will allow a beneficiary to attend a program of higher education. There is no tax deduction allowed for the contribution, but all deposits and earnings may be withdrawn free of tax and penalties if used to pay for the costs of higher education. Beginning in 2002, Coverdell ESA proceeds may also be used free of tax and penalty to pay for the qualified expenses for kindergarten through 12th grade education in public, private, and/or religious schools. Before 2002, contributions had been limited to a maximum of $500 per year, but beginning in 2002, allowable contributions increased to $2,000 per year. Contributions may be made regardless of the beneficiary's income, but cannot be made on or after the beneficiary's age 18. If distributions exceed the education expenses, the earnings must be included ratably in gross income and are subject to the 10% excise tax to the extent of the excess. Contributions begin to phase out at $150K for joint filers and $95K for single filers. The EIRA, if unused on or before age 30, may be transferred to another qualifying family member as the new beneficiary for educational use. Such transfers must occur before the beneficiary reaches age 30.
A Traditional IRA is the term for a regular IRA available to those under age 70 1/2 who have earned income (i.e., job compensation). Earnings within the traditional IRA grow tax-deferred until withdrawal. Withdrawals must begin, and will be taxed, when the owner reaches age 70 1/2. If required distributions are not taken at that age, a 50% penalty will be assessed on the amount not taken. When made, contributions may or may not be tax deductible. If a traditional IRA owner participates in an employer's qualified retirement plan on any day in the tax year, the deductibility of contributions declines to zero between certain AGI ranges as outlined in the deductibility table shown above. A working spouse not covered by a retirement plan through employment may make a tax-deductible contribution to a traditional IRA of up to the applicable annual limit shown in the above table despite the other spouse's coverage under an employer-provided retirement plan. When the couple's AGI reaches $150,000, deductibility for such contributions begins to decline, and it reaches zero at a joint AGI of $160,000.
A Roth IRA is one in which:
Contributions to the account are not deductible.
"Qualified" distributions (i.e., withdrawals) from the account are not taxable; and
Earnings on the account are taxable and subject to an early withdrawal penalty only when a withdrawal is not a "qualified" distribution.
A "qualified" distribution from a Roth IRA is a withdrawal that meets one or more of the following:

Made after the taxpayer attains age 59 1/2.
Made to a beneficiary after the taxpayer's death.
Made because the taxpayer is disabled.
Made by a first-time homebuyer to acquire a principal residence.
No withdrawal except those attributable to previously taxed contributions will be a qualified distribution unless it is made after the five-taxable-year period beginning with the tax year in which the taxpayer first contributed to a Roth IRA.

Annual contributions to a Roth IRA are subject to the contribution limits as shown in the above table, as reduced by any contribution made to a traditional IRA. Contributions to a Roth IRA may be made even after the owner reaches age 70 1/2. The annual contribution limit is phased out as AGI increases from $150,000 to $160,000 (married filing jointly) or $95,000 to $110,000 (single filer).

Amounts in traditional IRAs may be transferred to Roth IRAs provided the taxpayer's AGI (married or single) for the transfer year is $100,000 or less. Transferred amounts must be included in that year's income, but the money transferred will be exempt from the 10% excise tax for a withdrawal prior to age 59 1/2. No withdrawal allocable to earnings on the transferred amounts is considered to be a qualified distribution unless it is made more than five tax years after the transfer.

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