According to the Investment Company Institute, there were approximately 600,000 401(k) plans in the United States in 2020, with approximately 60 million active participants and millions of former employees and retirees.
In addition to 401(k) plans, there are also traditional and Roth IRAs, defined-benefit pensions, and cash balance plans.
Each type of retirement plan has its own set of advantages and disadvantages, and individuals should carefully consider their options before choosing a plan that best suits their needs.
Having a solid retirement plan in place is crucial for individuals who want to enjoy a comfortable retirement.
By understanding the different types of retirement plans available and choosing the one that best suits their needs, individuals can take steps to secure their financial future and enjoy their golden years with peace of mind.
Table of Contents
Types of Retirement Plans in the US
Retirement plans in the US are designed to help individuals save money for their retirement years. There are several types of retirement plans available, including:
1. Individual Retirement Arrangements (IRAs)
IRAs are personal savings plans that allow individuals to save money for retirement on a tax-deferred basis. There are two main types of IRAs: traditional and Roth. With a traditional IRA, contributions are tax-deductible, and taxes are paid when the money is withdrawn. With a Roth IRA, contributions are made with after-tax dollars, and withdrawals are tax-free.
2. 401(k) Plans
401(k) plans are employer-sponsored retirement plans that allow employees to make contributions to their retirement savings on a pre-tax basis. Employers may also contribute to the plan on behalf of their employees. 401(k) plans have contribution limits and may offer a variety of investment options.
3. 403(b) Plans
403(b) plans are similar to 401(k) plans, but they are designed for employees of non-profit organizations, schools, and other tax-exempt organizations. Contributions to a 403(b) plan are made on a pre-tax basis, and employers may also contribute to the plan.
4. Simplified Employee Pension (SEP) Plans
SEP plans are designed for small business owners and self-employed individuals. Contributions to a SEP plan are tax-deductible and are made by the employer on behalf of the employee.
5. Pension Plans
Pension plans are retirement plans that are funded by employers. They provide a fixed income to employees during retirement based on their years of service and salary history. Pension plans are becoming less common in the US, but they are still offered by some employers.
In conclusion, there are several types of retirement plans available in the US, each with its own set of rules and benefits. It’s important to understand the different types of plans and choose the one that best fits your needs and financial goals.
Defined Benefit Plans
Defined benefit plans are retirement plans that guarantee a specific benefit amount to employees upon retirement. These plans are largely funded by employers, and the retirement payouts are based on a set formula that considers an employee’s salary, age, and tenure with the company.
Pension plans are a type of defined benefit plan that provides a fixed retirement benefit to employees. These plans are funded by employers, who contribute to a pension fund on behalf of their employees. The pension fund is then invested in stocks, bonds, and other assets to generate returns that can be used to pay out retirement benefits.
Pension plans are typically funded by a combination of employer contributions and employee contributions. The amount of the retirement benefit is usually based on a formula that takes into account an employee’s salary, years of service, and age at retirement.
Cash Balance Plans
Cash balance plans are another type of defined benefit plan that provides a fixed retirement benefit to employees. These plans are funded by employers, who contribute to an individual account on behalf of each employee. The account earns a fixed rate of return, and the retirement benefit is based on the account balance at retirement.
Cash balance plans are often compared to traditional pension plans, but they have some key differences. For example, cash balance plans are typically more portable than pension plans, meaning that employees can take their account balance with them if they leave the company. Additionally, cash balance plans are often easier for employees to understand, as the retirement benefit is based on a single account balance rather than a complex formula.
Overall, defined benefit plans can provide a reliable source of retirement income for employees. However, they are becoming less common in the United States, as many employers are shifting towards defined contribution plans like 401(k)s.
Defined Contribution Plans
Defined contribution plans are retirement plans in which employees and employers make contributions to an account that is invested to provide retirement income. The amount of retirement income provided by the account depends on the contributions made and the investment returns earned. There are several types of defined contribution plans available in the US, including 401(k) plans, 403(b) plans, 457(b) plans, and Thrift Savings Plans.
401(k) plans are the most common type of defined contribution plan in the US. As of June 30, 2021, 401(k) plans held an estimated $7.3 trillion in assets and represented nearly one-fifth of the $37.2 trillion US retirement market. These plans are typically offered by private-sector employers and allow employees to contribute a portion of their salary on a pre-tax basis. Employers may also make matching contributions up to a certain percentage of the employee’s salary.
403(b) plans are similar to 401(k) plans but are offered by nonprofit organizations, such as schools, hospitals, and religious organizations. These plans allow employees to make pre-tax contributions to their retirement account, and employers may also make matching contributions. As of 2020, there were approximately 18,000 403(b) plans with 10.3 million participants.
457(b) plans are offered by state and local governments and certain tax-exempt organizations. These plans allow employees to make pre-tax contributions to their retirement account, and employers may also make matching contributions. Unlike 401(k) and 403(b) plans, there is no penalty for withdrawing funds from a 457(b) plan before age 59 ½ if the employee separates from service.
Thrift Savings Plans
Thrift Savings Plans (TSPs) are retirement plans for federal employees, including members of the uniformed services. These plans allow employees to contribute a portion of their salary on a pre-tax basis, and the government may also make matching contributions. As of June 30, 2021, TSPs held an estimated $900 billion in assets and had over 6 million participants.
Overall, defined contribution plans are an important tool for Americans to save for retirement. While there are several types of plans available, each with its own unique features, the goal is the same: to help individuals build a nest egg for their golden years.
Individual Retirement Accounts
Individual Retirement Accounts (IRAs) are a type of retirement account that can be established by individuals. There are four types of IRAs: Traditional IRA, Roth IRA, SEP IRA, and SIMPLE IRA.
A Traditional IRA allows individuals to contribute pre-tax dollars into an account that grows tax-free until retirement. At retirement, withdrawals are taxed as ordinary income. Contributions to a Traditional IRA are tax-deductible, subject to certain income limitations. The contribution limit for 2023 is $6,000, or $7,000 for individuals aged 50 or older.
A Roth IRA allows individuals to contribute after-tax dollars into an account that grows tax-free until retirement. At retirement, withdrawals are tax-free. Contributions to a Roth IRA are not tax-deductible, subject to certain income limitations. The contribution limit for 2023 is $6,000, or $7,000 for individuals aged 50 or older.
A Simplified Employee Pension (SEP) IRA is a type of IRA for self-employed individuals and small business owners. SEP IRAs allow for tax-deductible contributions of up to 25% of an employee’s compensation or $61,000, whichever is less. Contributions are made by the employer, not the employee.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of IRA for small businesses with fewer than 100 employees. Employees can contribute up to $13,500 in 2023, or $16,500 for individuals aged 50 or older. Employers must match employee contributions up to a certain percentage or make a non-elective contribution of 2% of each eligible employee’s compensation.
Overall, IRAs are a popular retirement savings vehicle for individuals and small business owners. Each type of IRA has its own unique features and benefits, making it important to understand the differences between them before choosing the right one for your retirement savings plan.
Profit Sharing Plans
Profit-sharing plans are a type of defined contribution plan that allows employers to share a portion of their profits with their employees. These plans are often used as a way to motivate employees and encourage them to work harder to increase company profits.
In a profit-sharing plan, employers make contributions to the plan based on the company’s profits for the year. These contributions are then divided among eligible employees based on a predetermined formula. The formula can be based on factors such as salary, length of service, or job title.
One of the advantages of a profit-sharing plan is that it allows employers to reward employees for their hard work and contributions to the company’s success. It can also help to improve employee morale and job satisfaction.
However, it is important to note that profit-sharing plans are subject to certain rules and regulations. For example, there are limits on the amount of contributions that can be made to the plan each year. In addition, the plan must meet certain nondiscrimination requirements to ensure that all eligible employees have an equal opportunity to participate.
Overall, profit-sharing plans can be a valuable tool for employers who want to incentivize their employees and improve company performance. However, it is important to carefully consider the pros and cons of this type of plan and to work with a knowledgeable financial advisor to ensure that the plan meets all legal requirements.
Money Purchase Plans
Money Purchase Plans are employer-sponsored retirement plans that require companies to contribute a specific percentage of an employee’s salary each year, regardless of the company’s profits. Employees do not contribute to this plan but may opt to have additional contributions made on their behalf.
Yearly payments to a Money Purchase Plan cannot exceed the lesser of 25% of the employee’s income or $58,000 for 2023. These plans are considered a type of defined contribution retirement plan, where the employer contributes a specific amount of the employee’s earnings each year.
One of the benefits of a Money Purchase Plan is that the employer’s contributions are tax-deductible. Additionally, the money in the plan grows tax-deferred until it is withdrawn.
However, Money Purchase Plans have some drawbacks. For example, they have less flexibility than other retirement plans, such as 401(k) plans, because the employer is required to contribute a specific amount each year. Additionally, employees may not be able to withdraw money from the plan until they reach a certain age or retire.
Overall, Money Purchase Plans are a good option for employers who want to provide a retirement plan for their employees and are willing to make a consistent contribution each year. However, employees should carefully consider the plan’s limitations and whether it meets their retirement savings needs.
Employee Stock Ownership Plans (ESOPs)
Employee Stock Ownership Plans (ESOPs) are a type of retirement plan in which the company contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees. ESOPs are qualified defined contribution plans designed to invest primarily in qualifying employer securities as defined by IRC section 4975 (e) (8) and meet certain requirements of the Code and regulations.
According to the National Center for Employee Ownership (NCEO), as of 2023, there were approximately 6,600 ESOPs in the United States, covering over 14 million employees. ESOPs are more common in closely held companies, with 80% of ESOPs being in companies with fewer than 250 employees.
ESOPs offer several benefits to both employers and employees. For employers, ESOPs can be a tool for retaining and motivating employees, as well as a means of financing growth or an exit strategy for the owner. For employees, ESOPs can provide a retirement benefit that is tied to the success of the company, as well as a sense of ownership and participation in the company’s success.
ESOPs are subject to various rules and regulations, including annual valuation requirements and restrictions on the sale of employer securities held in the plan. Employers who are considering setting up an ESOP should consult with legal and financial advisors to ensure compliance with all applicable laws and regulations.
Savings Incentive Match Plan for Employees
One of the retirement plans available in the US is the Savings Incentive Match Plan for Employees (SIMPLE). This is an employer-sponsored retirement plan that is designed to help small businesses provide retirement benefits to their employees.
The SIMPLE plan is similar to a 401(k) or 403(b) plan, but it is easier to set up and maintain. It allows employees to contribute a portion of their salary to the plan, and the employer can choose to match a percentage of those contributions.
One advantage of the SIMPLE plan is that it has lower contribution limits than other retirement plans, which can be beneficial for smaller businesses. In 2023, the contribution limit for employees is $14,000, and those over 50 can contribute an additional $3,000 as a catch-up contribution.
Another advantage of the SIMPLE plan is that it is easy to administer. Employers are not required to file annual reports with the IRS, and they are not subject to the complex testing requirements that other retirement plans have.
However, there are some limitations to the SIMPLE plan. For example, employers are required to make contributions to the plan, either by matching employee contributions or by making a non-elective contribution of 2% of each employee’s compensation. Additionally, the plan is only available to businesses with 100 or fewer employees.
Overall, the SIMPLE plan is a good option for small businesses that want to provide retirement benefits to their employees without the complexity and expense of other retirement plans.
Simplified Employee Pension Plans
Simplified Employee Pension (SEP) plans are a type of retirement plan that can be set up by employers for themselves and their employees. SEP plans are relatively easy to set up and administer, making them a popular choice for small businesses.
Contributions to a SEP plan are made by the employer and are tax-deductible. The employer can contribute up to 25% of each employee’s compensation, up to a maximum of $61,000 in 2022. There are no age or income restrictions for employees to participate in a SEP plan.
SEP plans are funded through individual retirement accounts (IRAs) set up for each plan participant. The employer makes contributions to the IRAs, which are owned and controlled by the employees.
One advantage of SEP plans is that they are flexible. Employers can choose to make contributions in any given year or not make any contributions at all. This can be helpful for businesses with fluctuating income or cash flow.
However, there are some limitations to SEP plans. For example, employees cannot make their own contributions to the plan, and the employer must contribute the same percentage of compensation to all eligible employees. Additionally, once an employee leaves the company, they are responsible for managing their own SEP-IRA account.
Overall, SEP plans can be a good option for small businesses looking for an easy and flexible way to provide retirement benefits to their employees.
Governmental plans are retirement plans for employees of state and local governments and other tax-exempt organizations. These plans are designed to provide retirement, disability, and survivor benefits to employees and their beneficiaries.
There are several types of governmental plans, including:
401(a) Plans: These plans are sponsored by a governmental entity and offer greater flexibility for the employer. They can be used for a variety of purposes, including retirement, disability, and survivor benefits.
403(b) Plans: These plans are available to employees of public schools, colleges, universities, and certain tax-exempt organizations. They operate in a similar manner to 401(k) plans and allow employees to save for retirement on a tax-deferred basis.
457 Plans: These plans are available to employees of state and local governments and certain tax-exempt organizations. They allow employees to defer a portion of their compensation on a tax-deferred basis and offer a variety of investment options.
Governmental plans are subject to specific rules and regulations under the Internal Revenue Code. For example, contributions to these plans are subject to annual limits, and distributions are generally subject to income tax.
In addition to these plans, most federal employees participate in one of two retirement savings programs: the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS). Employees in both systems may also participate in the federal Thrift Savings Plan (TSP), which is similar to a 401(k) plan.
Overall, governmental plans are an important part of the retirement landscape in the US, providing retirement security for millions of workers in the public sector.
Church plans are a type of retirement plan established by churches or church-related organizations. These plans are exempt from certain federal pension and tax laws, which means that employees covered by church pension plans are denied the basic protections provided to virtually all other private-sector workers who participate in retirement plans.
Church pension plans are classified as “church plans” under the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA). This classification allows churches to operate their retirement plans without complying with certain federal regulations.
Church plans come in different types, including defined benefit and defined contribution plans. The Retirement Savings Plan of the Presbyterian Church (U.S.A.) is an example of a defined contribution 403 (b) (9) plan offered by the Board of Pensions with unique features that can only be offered by church plans.
It’s important to note that while church plans are exempt from certain federal regulations, they are still subject to state laws and regulations. Additionally, some church plans have faced financial challenges in recent years, leading to concerns about the retirement security of employees covered by these plans.
Overall, church plans offer unique benefits and exemptions for churches and their employees, but it’s important for individuals to carefully consider their retirement options and understand the potential risks and limitations of these plans.
Roth 401(k) and Roth 403(b) Plans
Roth 401(k) and Roth 403(b) plans are similar to traditional 401(k) and 403(b) plans, but with one key difference: contributions to Roth plans are made with after-tax dollars, while contributions to traditional plans are made with pre-tax dollars. This means that while contributions to traditional plans reduce your taxable income for the year, contributions to Roth plans do not.
One benefit of Roth plans is that withdrawals in retirement are tax-free, as long as certain conditions are met. This can be advantageous for individuals who expect to be in a higher tax bracket in retirement than they are currently.
Another benefit is that there are no income restrictions on who can contribute to a Roth 401(k) or 403(b) plan, unlike with a Roth IRA. However, there are contribution limits that apply to both traditional and Roth plans. In 2023, the contribution limit for both types of plans is $19,500 for individuals under 50, with an additional catch-up contribution of $6,500 for those 50 and older.
It’s also important to note that while employers are not required to offer Roth options in their retirement plans, many do. If your employer offers a Roth 401(k) or 403(b) option, it may be worth considering as part of your retirement savings strategy.
Here’s a quick summary of the key differences between traditional and Roth 401(k) and 403(b) plans:
|Traditional Plans||Roth Plans|
|Contributions made with pre-tax dollars||Contributions made with after-tax dollars|
|Contributions reduce taxable income for the year||Contributions do not reduce taxable income for the year|
|Withdrawals in retirement are taxable||Withdrawals in retirement are tax-free, as long as certain conditions are met|
|Income restrictions on contributions||No income restrictions on contributions|
|An employer may or may not offer a Roth option||Employer may or may not offer a Roth option|
Overall, Roth 401(k) and 403(b) plans can be a valuable addition to your retirement savings strategy, particularly if you expect to be in a higher tax bracket in retirement than you are currently. It’s important to consider your individual financial situation and goals when deciding whether to contribute to a Roth plan or a traditional plan.
Non-qualified Deferred Compensation Plans
Non-qualified deferred compensation (NQDC) plans are a type of retirement plan that is not subject to the same rules and regulations as qualified plans, such as 401(k) plans or IRA plans. These plans are sometimes known as deferred compensation programs, elective deferral programs, or supplemental executive retirement plans (SERPs).
NQDC plans allow executives to defer a much larger portion of their compensation and to defer taxes on the money until the deferral is paid. However, NQDC plans are not for everyone, as they are typically only offered to highly compensated employees and executives.
There are several types of NQDC plans, including:
- Voluntary Deferral Plans: These plans allow participants to defer a portion of their salary or bonus into the plan, which is then invested and grows tax-deferred until the participant receives the money.
- Excess Benefit Plans: These plans provide benefits to highly compensated employees that exceed the limits of qualified plans.
- Equity Arrangements: These plans provide executives with equity in the company, which can be deferred until retirement.
- Wraparound 401(k) Plans: These plans allow participants to defer additional amounts of their salary into a 401(k) plan, beyond the limits of a traditional 401(k) plan.
- Bonus Plans: These plans allow executives to defer their annual bonus into the plan, which is then invested and grows tax-deferred until the participant receives the money.
NQDC plans are not subject to the same rules and regulations as qualified plans, which means that they can be more flexible in terms of contributions and distributions. However, they are also subject to more risk, as they are not protected by the same ERISA rules that govern qualified plans.
Overall, NQDC plans can be a useful tool for executives and highly compensated employees to save for retirement and defer taxes on their compensation. However, they are not for everyone and should be carefully considered in light of the individual’s financial situation and goals.