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Personal and Business Banking

Building a Nest Egg

StreetWise Consumer Education Program

  • Summary
  • Article

Different Types of Retirement Plans Available

Under the general term "retirement plans" fall many options for saving and investing money for retirement. Such financial retirement plans may be either individual plans or employer-related plans. Typically, these plans have certain tax benefits over other savings and investment strategies.

The most familiar personal plans are IRAs, Individual Retirement Accounts. IRAs are a personal retirement savings plan that you can open at a credit union, bank, savings and loan, brokerage or other IRS-approved entity.

Employers may offer a few different kinds of retirement plans. There's the traditional pension that's also known as a "defined benefit plan." They promise a specific monthly benefit upon retirement. There are 401(k)s or profit-sharing plans that are also known as "defined contribution plans." The contributions by employees and employers are defined but the benefit to be paid is not.

  • A 401(k) plan

    A 401(k) plan is similar to an IRA except that it is established by an employer. It is funded with your pre-tax salary contributions and possibly with matching contributions from your employer. Typically, larger contributions can be made to 401(k)s than to most IRAs. The money in your 401(k) account is tax-deferred until you withdraw the money.

  • A simplified employee pension plan

    A simplified employee pension plan, also called a SEP plan, is an IRA (SEP-IRA) that has been set up to receive contributions from your employer. You may also have a SEP-IRA if you are self-employed. The SEP-IRA is owned and controlled by you. The maximum amount an employer can contribute to your SEP-IRA is the smaller of 25% of your compensation or $44,000 (for 2006 and subject to cost-of-living adjustments for later years).

  • A Savings Incentive Match Plan for Employees,

    A Savings Incentive Match Plan for Employees, also called a SIMPLE plan, is established by a small employer (including self-employed persons). This type of plan allows an employee to reduce their salary and have their employer contribute the salary reduction to a SIMPLE retirement account. The employer must also make contributions to the account. The SIMPLE retirement account can be either a SIMPLE IRA or as part of a 401(k) plan.

In some cases, you can have both a 401(k) or other employer-sponsored retirement plan and an IRA. Many financial planners recommend this approach where applicable.

Social Security Benefits

The Social Security Administration is the place to start for information on Social Security benefits, your personal statement, how the timing of your retirement will affect benefits, and how to apply for benefits.