Other Retirement Plans
Other Retirement Plans — Expanding savings options beyond the 401(k)
Unlike the 401(k), the 401(a) is only for employer contributions. Employees are not allowed to save their own money in this type of plan. The employee selects and manages the investment mix. Plan rules for taxes, withdrawals and loans are similar to a 401(k). Taxes will be owed when withdrawals are made from the plan. Withdrawals prior to age 59 ½ are also subject to a 10 percent IRS early withdrawal penalty, unless an IRS exception applies.
Employers can offer more types of retirement plans than a 401(k).
Non-qualified plans allow select employees to defer a portion of their paycheck into a retirement savings account. These plans are designed to meet the specialized retirement savings needs of highly compensated executives who often can’t save enough in a qualified 401(k) plan because of IRS salary restrictions. Employers often offer these plans to retain key employees.
Pension plans, also called defined benefits plans, come in two basic forms:
- Traditional — The retirement benefit is determined based on a formula that takes into account criteria such as average salary, years of service, and participant's age when the benefit starts. The employer funds the plan based on what the future income benefit will be. The plan retains the risk that if the underlying investment does not perform well, the plan will have to contribute additional funding.
- Cash balance — The employer promises to deposit a certain dollar amount or percentage of pay into the plan. The retirement benefit is determined based on the balance in the account at retirement. The employee’s retirement benefit is unknown until retirement since the underlying investment performance is a leading factor in the benefit amount.
In this type of plan, the employer makes voluntary contributions based on the profitability of the company. Contributions are not mandatory. Some companies offer a combination of a cash balance plan for consistent contributions and a profit sharing plan that allows them to contribute more when business is good.
Reaching your savings goals
The retirement savings arena is filled with different options. Regardless of what type of company you work for and how much money you make, chances are you have access to an employer-sponsored retirement plan that can help you reach your retirement savings goals.