Saving for retirement
Common employer retirement plans
1. 401(k) plan. A 401(k) plan allows employees to contribute a portion of their wages toward retirement savings through payroll deductions. Many (though not all) employers choose to match a portion of their employees' contributions. Participants contribute to a 401(k) plan with pre-tax money and pay taxes upon withdrawal in retirement; however, some employer plans may allow post-tax contributions (Roth contributions) and withdraw the money tax-free in retirement.
2. 403(b) plan. A 403(b) plan is similar to a 401(k), but is specifically for employees of public schools, certain nonprofits, and other tax-exempt organizations. It also allows employees to contribute part of their salary to the plan, with similar tax advantages such as employer match, higher contribution limits, and tax savings.
3. Defined benefit plan (pension plan). A pension plan provides a fixed, preestablished benefit for employees at retirement, based on factors such as their previous salaries and how long they have worked for the company. With a pension plan, the employer is responsible for managing the investments and assuming the investment risk, ensuring there are enough funds to provide the promised benefits.
Each of these plans has specific rules regarding eligibility, contributions, and withdrawals, with the goal of helping plan participants save for retirement.
