Retirement is still a relatively new concept to our species, as it has only really been implemented since the 18th century. Many people have misconceptions about retirement, and it’s also charged with a lot of anxiety, especially amongst older generations.
Dispelling these misconceptions and reducing that anxiety has become a priority for employees who need their elderly staff to comfortably vacate their positions when the time comes.
As a way to equip employers to empower their employees for their coming retirement, I’ve worked alongside a Professional Employer Organization (PEO) to outline succinct definitions of the various retirement plans.
Here is a brief glossary of the more common retirement plans, which can be printed and given to youremployees to help them understand retirement.
What is Retirement?
Before getting into the many intricacies within retirement, it can help to have a solid definition to go from. Here is what the Macmillan Dictionary defines as retirement:
‘the time when you stop working, especially because you have reached the age when you are officially too old to work, or the act of doing this’
From here we can start to look at the many different types of retirement plans and funds.
Types of Retirement Plan
There are many differentforms of the workplace retirement plan which millions of Americans relyupon for those later years of their lives.
Pension Plan
While terms like ‘retirement’ and ‘pension’ seem interchangeable, there is a difference between a workplace retirement plan like a 401k and a pension plan. A pension plan is also known as a ‘defined benefit plan’, which alludes more to the actual nature of the plan.
This is a sponsored retirement account which is funded by your employer according to a formula which takes into consideration such things as: salary, age, and the number of years you have worked at your company.
Defined Contribution Plans
The main difference here is that the defined contribution (DC) plans such as the 401k or 403b plan are usually funded by the employee, with some employers matching the contribution.
401k
This is a tax-advantaged plan which offers an easy way to save for retirement. With a traditional 401k, the employee contributes to the plan with pre-tax wages, meaning those contributions aren’t considered taxable income. This plan allows these contributions to grow tax-free until they’re withdrawn at retirement. One downside of this plan are the penalties applied to early withdrawals, and qualifying for an emergency withdrawal can be difficult.
Roth 401k
Similar to the traditional except the gains are not taxed as long as they’re withdrawn after the individual is 59 ½ years old. These are more suited to those who expect their tax rate to be higher during retirement than at the time of contribution.
403b
The 403b plan is much the same as a 401k, except that it’s offered by public schools, charities and some churches, among others. The 403b plan also offers a Roth version which offers the same benefits as mentioned with the Roth 401k. The same downside of the 401k applies
457b
Again, the 457b issimilar to the 401k, except that it’s only available to employees of state and local governments and some tax-exempt organizations. Generally speaking,the 457b is a supplement savings plan, which means early withdrawals aren’t subject to the 10 percent penalty that 403b plans are
Individual Retirement Arrangement (IRA)
Unlike the defined contribution retirement funds which are usually gained as a workplaceretirement plan, IRAs are self-driven and offer different benefits.
Traditional IRA
All contributions can be made with pre-tax dollars from your income, and remain tax-free until theirwithdrawal. They also allow for an almost unlimited amount of investments, although those investments do need to be made by oneself.
Roth IRA
This is similar to an IRA except that contributions are made with after-tax dollars, which means you don’t have to pay taxes on earnings during retirement.
The Roth IRA also allows for withdrawals of contributions (not earnings) without tax or penalty, making it an excellent retirement plan for most.
SIMPLE IRA
Remarkably similar to the 401k, except without the annual non-discrimination tests which ensure that highly paid workers aren’t contributing too much to the plan. The SIMPLE IRA allows employers the choice of whether to contribute a 3 percent match or make a 2 percent non-elective contribution, regardless of whether the employee has made a contribution.
Professional Employer Organization (PEO)
