What You Should Know About Retirement Plans

But today, the bulk of responsibility for retirement saving has shifted to employees themselves. Defined contribution (or DC) plans have replaced DB plans at most companies. DC plans are funded mainly by employee contributions: While employers may choose to match these contributions, they may not be required to, depending on the type of plan.

The good news is that the federal government is doing its part to encourage retirement saving by offering generous tax breaks—to both employers that offer qualified DC plans and employees who participate in them. The most popular tax-advantaged retirement plans include:

Traditional IRA:The “granddaddy” of retirement savings plans, IRAs were introduced in 1975 as the first government-sponsored, tax-advantaged tool to help average Americans save for retirement.

Traditional IRAs offer tax-deferred growth and an immediate tax break for individuals who qualify in the form of a deduction equal to the amount of their annual contribution. The maximum annual IRA contribution amount in 2012 is $5,000, or $6,000 for individuals age 50 or over.

Roth IRA:The Roth IRA differs from a traditional IRA in two key respects: First, there is no tax deduction for annual contributions. But this is offset for many individuals by the fact that contributions grow tax-free, instead of just tax-deferred, which can make a big difference over the life of the account.

Keep in mind that eligibility for contributing to a Roth IRA phases out above certain adjusted gross income (AGI) limits. In 2012, single individuals with AGI of more than $125,000, or married couples with AGI of more than $183,000 who file jointly, cannot contribute to a Roth IRA.

Simplified Employee Pension plans (SEPs) and SIMPLE IRAs: These are designed primarily for employees of small businesses and self-employed individuals. In 2012, individuals may contribute up to the lesser of 25% of compensation or $50,000 to a SEP or $11,500 to a SIMPLE IRA (or $14,000 for individuals age 50 or over).

401(k):The 401(k) is the most popular company-sponsored retirement plan in the U.S. Employees make tax-deductible contributions that can be matched by their employers (who may also receive a tax deduction). In 2012, employees and employers can contribute up to $17,000 combined to employees’ 401(k) accounts, or $22,500 for employees age 50 or over.

403(b) and 457 plans: These are similar to 401(k) plans but are designed specifically for employees of educational and non-profit organizations. The annual contribution limits are the same as for 401(k) plans.

While Social Security may provide some income for you in retirement, it’s usually not wise to rely on this as your sole source of retirement income. So take steps today to take control of your retirement finances by opening a retirement savings account or participating in a plan offered by your employer.