We all want to have a career, climb the ladder in the career, and eventually retire from the career. Every person has a plan for their future and decides when to retire. One aspect of retirement is that a regular income from an employer may not be available. Due to this aspect, it is important to plan the best way to manage one’s life when they retire. Retirement is easy and manageable if one is under a great retirement plan that works for their lifestyle. There are many retirement plans in the market – some of these are 403B, 401K, pension, annuities, IRA, and estate planning.
403(b) Plan
A 403(b) plan is a tax-sheltered annuity plan that applies to employees in public schools, governmental organizations and some tax-exempt organizations like non-profits. It is similar to the 401K only that they are for this type of organizations. This plan can be in form of an annuity, custodial account investing in mutual funds or a retirement income account for church workers. The employers are the only people who can set up this plan – those who are self-employed in the eligible organizations cannot also set up the 403(b) account. In this plan, the contributions made are elective deferrals (salary reduction plan), non-elective contributions (made by the employer only), after-tax contributions (contributions are taxable), or a combination of them (IRS, 2018) . These contributions have an annual limit for which one cannot exceed.
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This plan is beneficial as it is tax-exempt meaning no income tax is remitted on the contributions until you start to make withdrawals. However, one has to pay the social security and Medicare tax on their contributions. Another benefit is that the benefits and gains are also tax exempt until withdrawal. This refers to the returns and bonuses from the retirement contributions. This plan also allows for saver's credit for elective deferrals contributed in the 403(b) account.
401(K)
401(K) plan is the most popular. It is an arrangement made with an employer for salary reduction, that is, an employee defers a part of their income to contribute towards their retirement. There are two types of 401(k) plan; the traditional and Roth plans whose difference is the tax advantage in the contributions. In the traditional plan, employees make pre-tax contributions taxed on withdrawal. In the Roth plan, contributions are after-tax and the withdrawals are tax-free when certain conditions are met. 401(k) have contributions as matching (employer matches employee’s contributions) or as non-elective (only the employer makes them) (IRS, 2017) . Just like the 403(b) plan, there are limits to the salary deferral contributions and withdrawals.
The greatest advantage of this plan is the tax advantage on the contributions. This plan allows pre-tax contributions hence the taxable income of an employee is lower. The dividends and gains from the plan are also tax exempt until withdrawal. If your employer matches your contribution, you are able to save more in the plan. Another benefit is that contributions are a lifetime, unlike most retirement accounts. 401(k) plan offers shelter from creditors meaning IRS cannot place a lien on the account (IRS, 2017) .
Pension
Under the Employee Retirement Income Security Act (ERISA), there are two pension plans – the defined benefit and defined contribution plans. The defined benefit plan is based on an agreed monthly benefit on retirement. The defined contribution pension plan provides an agreed contribution by the employee and employer towards retirement, not an agreed benefit. A pension plan can also be simplified employee pension plan (SEP) where retirement contributions are made in individual retirement accounts on a tax-advantaged basis. The advantages of this plan are the tax benefits and returns from savings. However, there is a limitation to access and a penalty if withdrawals are made early (Cassidy, 2006) .
Annuities
Annuities are regular payments at certain intervals towards an account. Insurance companies and financial institutions offer this plan. Annuities differ in terms of payment intervals, returns, valuation, and deferral. You can opt to receive them for the rest of your life or for a specified set of years. Payments are either fixed (guaranteed pay) or variable (based on the performance of the annuities’ investments). There is a range of annuities depending on which one works best for needs of a specific person. The main advantage of this plan is that the investment grows in value out of a guaranteed stream of monthly payments. However, these plans can be bad investments due to the high expenses depending on the choices (Cassidy, 2006) .
IRA
Individual Retirement Accounts (IRAs) are simplified pension plans for individual contributors or employees with the tax-advantage. Employees do not have the advantage of their employers matching their contribution. However, the individual has a range of investment choices, as they are the controller of the account. There is a high freedom of investment when it comes to IRAs compared to the other pension plans that are controlled by fund managers. The main advantage of the IRAs is the tax deduction on income when you contribute. The gains from the investments are also not taxable. However, just like most retirement plans, the withdrawals are part of taxable income. With these traditional IRAs, an account owner is liable for an additional 10% tax penalty if they withdraw before retirement (age 59.5 years). These accounts have so many restrictions on your savings (Cassidy, 2006) .
Estate Planning
Estate planning is the process of deciding on the distribution of assets after you die or are senile to make financial decisions. It is a way of fairly providing an inheritance to your existing beneficiaries. It is a complicated way of retirement planning and may require consultation with a financial advisor and a lawyer. Estate planning requires a will, assignment of power of attorney or a living will. Estate planning is advantageous in determining who takes care of your assets and reduce taxes from your estate. This retirement plan is beneficial to those who have assets like investments, retirement accounts, insurance policies, real estate, etc. If an individual has inheritable assets by beneficiaries, estate planning is a super retirement strategy (Cassidy, 2006) .
Best Retirement Option
If I were the mentioned employee, with a good salary, I would choose the 401(k) and the defined contribution pension plan. With these two plans, I can manage to maximize my contributions especially if my employer can match my contribution. Raising $3 million dollars for approximately 36 years would require me to contribute about $84,000 per year to my retirement. I can achieve this by having the two retirement plans with a match from my employer. The contribution limit for 2018 is $18,500 therefore if my employer matches the same by 50%; I get to save $27,750 in 2018. This is great progress in my retirement account.
Factors to Consider when Selecting a Retirement Option
There is so much information that comes with each retirement plan. It is important to consider the requirements, advantages, and constraints. For a plan like the 401(k), an act guides this retirement plan is important to assess and analyze the information. It is important to know the limits to the contributions, returns, and compensations during retirement. Another important aspect is the retirement age and rules on early retirement. For an employer, it is important to seek the expertise of the HR to determine how your employer matches and supports employees on retirement. All these considerations will help in selecting a retirement plan either individually or with your employer.
References
Cassidy, D. (2006). A Manager's Guide to Strategic Retirement Plan Management. Hoboken: J. Wiley & Sons.
IRS. (27 August 2017 г.). 401(k) Plans . Получено 27 February 2018 г., из IRS: https://www.irs.gov/retirement-plans/401k-plans
IRS. (24 January 2018 г.). Publications: 403(b) . Получено 27 February 2018 г., из IRS: https://www.irs.gov/publications/p571#en_US_201801_publink1000239614
