Letting Your Employer Help You
For most of the 20th century, companies paid the retirement incomes of their long-term employees, so the employees didn't have to worry about saving for their retirement years.
How times have changed in the 21st century! Most employees do not stay with companies long enough to be considered long term, and most companies do not provide any of their own money to fund retirement accounts. There are a few exceptions, however, discussed in the following sections.
Pension Plan
Your company places money into a retirement account (the amount contributed on your behalf depends on your income, age, and years of service), manages that account, and pays benefits to you from that account when you retire.
When you receive distributions from a pension plan (either monthly, annually, or in a lump-sum payment), you're taxed on the income.
Profit Sharing/401(k)/403(b)/457
In this type of plan, your company contributes money, tax-free, into an individual account on your behalf based on how much you ask to have contributed (the IRS sets limits, but they're too detailed to include here).
Some companies match all or part of these contributions, making your potential annual contribution quite high. Distributions at retirement are taxed.
401(k) plans are used at for-profit companies; 403(b) plans are used at religious, educational, and charitable organizations; 457 plans are used for employees of state and local governments.
Take advantage of any employer-matching plans, because the employer is offering you free money for retirement. If you can contribute to only one type of retirement account and you have an employer-matching plan at your company, participate in it up to its limits!
SIMPLE-IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is similar to a traditional IRA and a SEP-IRA. A SIMPLE-IRA is set up by a business with fewer than 100 employees (including yours, if you own a small business). Contribution limits to a SIMPLE-IRA are currently over $10,000 and increase each year.
The employer then matches a portion of your contribution — usually a dollar-for-dollar match — for up to 3 percent of your income.
Employee Stock Ownership Plan
An Employee Stock ownership Plan (ESOP) is a retirement account made up mostly of company stock paid for by your employer and, potentially, added to with purchases of company stock that you make. ESOPs can be difficult to take with you if you leave the company, but they can often be transferred into company stock or cash.
To find out what your company has to offer, visit the human resources department and ask questions about what's available. You won't have to commit to a plan at that point, but you can use the information to see how much you can save for your retirement with a contribution that's automatically withdrawn from your paycheck.
Keep in mind that your ESOP is worth only what your company's stock is worth. If you have any doubts about whether your company will still be in business when you retire, don't count on the money from your ESOP as retirement income.
Other Plans
Several dozen other types of employer-contribution plans exist, but many are no longer in existence.
For a complete list, visit the Motley Fool's Foolish Retirement Plan Primer. You can also visit your local library and ask for help in researching employer-contribution plans.
