Various Types of Retirement Plans

Retirement is one of life's biggest worries and thus planning for a suitable retirement scheme plays a very important role in providing a source of income in an individual's retired life. Believe it or not, the retirement life of a person can span up to a third of a lifetime of an individual. Thus planning properly for your retirement is like saving for a 25 year long vacation. Thus, to afford an expense of that magnitude, one has to properly start planning from an early stage of life.

Moreover, planning for one's retirement makes sure that you are not stranded on account of lack of finances at a later stage. For some, the retirement plans are sponsored by their employers whereas for others, like the self employed individuals, planning a suitable retirement plan is very much necessary. There are various kinds of retirement plans which are aimed at different type of individuals. Most of these plans differ according to the economic status of the person.

Types of retirement plans that are mainly sponsored by the employer:

    Simple IRA: this retirement plan is mainly meant for employers who are managing a company of less than 100 employees. In this case the employee contribution is not mandatory. However, regardless of the fact that whether the employee contributes or not, the employer has to definitely contribute. The employer has the authority to choose whether to make matching or non-elective contributions. For additional information regarding the same, you can seek the guidance of your financial councilor.
    Simplified Employee Pension (SEP): this retirement plan is ideal for small business undertakings where the number of employees is less than 25. The self employed individuals, who wish for a retirement plan which can be administered with very less paperwork and minimal IRS reporting and disclosure can also opt for this plan. For this plan, the vesting schedule is immediate. Any employee who is over the age of 21 and has been with the firm for at least three of the preceding 5 years is eligible to receive contributions. In this case the employee is not expected to contribute and the employer contributions are tax deductible. Thus, the employer can decide on the amount of contributions. The amount is different for every tax year and thus can be verified from the concerned authorities.
    401(k) plans: for company 401(k) plans, employee contributions grow tax deferred and thus there are strict penalties for early withdrawals. Usually companies offer only one of the following 401(k) plans: Safe harbor 401(k), Traditional 401(k) or Simple 401(k) plans. Whereas some of the companies also offer a Roth 401(k) plan which allows the participants to make either an after tax or a pre-tax salary deferral contribution. For all the 401(k) plans the employee contribution limits is the same.

The most popular retirement plans which are not based on employment are Individual Retirement Accounts (IRAs) which are of mainly 2 different types: Roth IRA or Traditional IRA.

One should realize the importance of saving money for retirement and make a conscious effort to save for the same so that one can enjoy the golden years of retirement without having to worry about finances.