Retirement Planning

Overview of the Most Popular Retirement Plans

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.

401(k) plan: 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. You can choose either a traditional 401(k) or a Roth 401(k).

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 on elective deferrals are the same as for 401(k) plans.

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).

Deferred profit sharing plan: This plan helps businesses attract the highest caliber employees by letting employees share in the company’s profits, which gives them a greater sense of ownership in the business. Contributions are discretionary for the business — if profits are down for a particular year, the business can lower its contribution percentage or eliminate contributions altogether.

Money purchase plan: This is similar to a profit sharing plan but with two key differences: First, employers are required to contribute money each year, regardless of whether or not the company was profitable. And second, both employers and employees can make contributions (only employers are allowed to contribute to profit-sharing plans). Money purchase plans are sometimes used in conjunction with profit-sharing plans.

Annuity: Because they may allow investors to receive a fixed amount of guaranteed income for a specified length of time in retirement — including the rest of their lives, if they choose — annuities may be a good choice for saving for retirement. There are two main types of annuities: deferred annuities and immediate annuities. Which type is best for you depends on several different factors.