Retirement Plan Savings 101

This time of year there are many employee benefit emails being churned through inboxes. Some of these benefits are time sensitive and can only be changed during qualifying events. Many times these benefits include health insurance coverage, group life and disability insurance coverage, and Health Savings or Health Reimbursement account withholdings. One benefit that is available to many employees, and can be changed at any time, is a retirement savings account. The maximization of these account benefits can result in a large reduction of your year-end tax bill. Let’s take a look at a few of the major plans approved for use by the IRS.

The 401(k):

The 401(k) is the most popular defined contribution plan available. The plan sponsor (the company) sets up the rules for employer contributions, which is approved by the IRS. Participants (employees) also have some decisions to make in regards to contributing to the account. For employees younger than 50, the 2014 maximum funding is $17,500 and for those older than 50 the maximum is $23,000. This employee contribution is subtracted from the employee’s taxable income for the year. This can lead to significant tax savings, but will also reduce the amount of take home pay for the employee. Similarly, some plans allow for a Roth 401(k). This plan functions the same way as the traditional 401(k), except employees do not get to exclude contributions from taxable income. However, once the employee reaches retirement age, all withdrawals from the Roth 401(k) are tax free, unlike a traditional 401(k).

The 403(b):

The 403(b) functions very similarly to the 401(k) but is only offered in certain types of organizations. Primarily, the 403(b) is offered to employees in public education and most non-profit organizations. The contribution limits are the same as the 401(k), with a slight advantage with the “catch up” rules.

SEP/SIMPLE Plans:

SEP IRAs and SIMPLE IRAs are two savings vehicles available to small business owners. These accounts give small business owners and their employees access to tax-deferred savings vehicles with lower administrative costs. The SEP IRA’s contribution limit is similar to the 401(k) and 403(b), but based on the discretion of the business owner. This is different from a 401(k), for which an employer is required to contribute a certain amount. The SIMPLE IRA has a maximum salary deferral of $12,000 for 2014, with a $2,500 catch-up for employees older than 50.

This just scratches the surface of the details involved with employer sponsored savings plans. If you have questions about whether you are making an appropriate deferral, contact your advisor for a review of your situation. If you own a business and are interested in establishing a company plan, contact Neal Nolan, our Director of ERISA for a comprehensive consultation.

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