Experts estimate that in the American workforce as a whole, workers will need 70 to 90 percent of their pre-retirement income to maintain their current standard of living when they stop working. Lower income earners may need more than 90 percent. Among workers 25 to 64 years of age, a little more than half are participants in an employer-sponsored retirement plan.
You can help your employees save for the future and help secure your own retirement with a retirement savings plan. Offering a retirement plan may also help you attract and retain better-qualified employees. Tax advantages have made it more appealing than ever to establish and contribute to a retirement plan. These tax advantages may include the following, depending on the type of plan selected:
- Employer contributions are deductible from the employer’s income;
- Employee contributions (other than Roth contributions) are not taxed until distributed to the employee; and
- Money in the plan grows tax-deferred.
Here is a basic overview of four different retirement plans.
Payroll Deduction IRA
- Key Advantage: Easy to set up and maintain.
- Sponsor or Eligible Employer: Any employer.
- Plan Contributions: Employees can decide how much to contribute.
- Maximum Annual Contribution (per participant): Employee: $6,000 for 2019. Age 50 or over: additional employee contribution of $1,000 for 2019.
- Loans: Not permitted.
- Withdrawals: Permitted at any time and are subject to federal income taxes (an additional 10% tax applies if before age 59½).
- Distributions: Participants must start receiving distributions by April 1 of the year following attainment of age 70½ (special rule applies to Roth IRAs).
- Vesting: Contributions are immediately 100% vested.
Simple IRA Plan
- Key Advantage: Salary reduction plan with little administrative paperwork.
- Sponsor or Eligible Employer: Employers with 100 or fewer employees that do not currently maintain another plan.
- Plan Contributions: Employees can decide how much to contribute. Employer must make matching contributions or contribute 2% of each eligible employee’s compensation.
- Maximum Annual Contribution (per participant): Employee: $13,000 for 2019. Employer: either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 of 5 years); or contribute 2% of each eligible employee’s compensation. Age 50 or over: additional employee contribution: $3,000 in 2019.
- Loans: Not permitted.
- Withdrawals: Permitted at any time and are subject to federal income taxes (an additional 10% tax applies if before age 59½; 25% if less than 2 years of participation).
- Distributions: Participants must start receiving distributions by April 1 of the year following attainment of age 70½ (special rule applies to Roth IRAs).
- Vesting: Employer and employee contributions are immediately 100% vested.
401(k)
- Key Advantage: Permits high level of salary deferrals by employees. May include designated Roth program.
- Sponsor or Eligible Employer: Any non-government employer.
- Plan Contributions: Employee elective deferral contributions. Employer contributions are permissible but not required.
- Maximum Annual Contribution (per participant): Employee Elective Deferrals: $19,000 for 2019. Employer & Employee: lesser of $56,000 for 2019 or 100% of compensation. Age 50 or over—additional elective deferrals: $6,000 in 2019.
- Loans: May be permitted.
- Withdrawals: Permitted after a distributable event occurs (e.g., retirement, death, disability, severance from employment). Hardship withdrawals may be permitted. Early withdrawals subject to 10% additional tax.
- Distributions: Must start receiving distributions by April 1 following the later of year of retirement or attainment of age 70½.
- Vesting: Employee elective deferral contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms.
Defined Benefit Plan
- Key Advantage: Provides a fixed pre-established benefit for employees.
- Sponsor or Eligible Employer: Any employer.
- Plan Contributions: Primarily funded by employer.
- Maximum Annual Contribution (per participant): Actuarially determined contribution.
- Loans: Permitted.
- Withdrawals: Early withdrawals subject to 10% additional tax.
- Distributions: Payment of benefits after a distributable event occurs (e.g., retirement, death, disability, severance from employment). Must start receiving distributions by April 1 following the later of year of retirement or attainment of age 70½.
- Loans: Permitted.
- Vesting: May vest over time according to plan terms.
