Your 2016 Guide to Retirement Plans

By Markets

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Saving for retirement is the biggest challenge that many people face in managing their money. You want to make sure you have enough to live well when you stop working, but finding ways to set money aside is tough. Retirement plans can help make saving for retirement easier, because they give you tax advantages that you won't get in regular investing accounts. Below, we'll look at the many different types of retirement plans to help you figure out which ones are best for you.


Which Employers Typically Use Them

2016 Maximum Employee Contribution


Large and mid-sized companies

$18,000 / $24,000


Schools and non-profit organizations

$18,000 / $24,000


Government agencies and non-profits

$18,000 / $24,000


Small businesses

$12,500 / $15,500


Small businesses and self-employed individuals

None (employer contributions only)


N/A-not related to employer

$5,500 / $6,500

Data source: Internal Revenue Service. * Second figure takes catch-up contribution for age 50 and older into account.

2 ways to save for retirement

The first thing to understand about retirement saving is that there are two major categories of savings vehicles. Most of the plans in the table above are employer-sponsored plans, meaning that individuals aren't allowed to set them up on their own and most rely on their places of employment to create and manage them. The regular IRA and the related Roth IRA, on the other hand, are savings vehicles that anyone can create on their own without employer assistance as long as they have the earned income to qualify.

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There typically aren't restrictions on contributions both to an IRA and to an employer-sponsored retirement plan. However, the deductibility of traditional IRA contributions does depend in part on whether you're covered by a retirement plan at work, so there can be tax implications if you have access to both types of retirement savings.

How 401(k)s, 403(b)s, and 457 plans are more similar than you'd think

It can be intimidating as an employee to deal with retirement plans named after different sections of the Internal Revenue Code. However, 401(k) plans, 403(b) plans, and 457 plans share a lot in common. They all have the same employee contribution limits, and they all typically give their participants an opportunity to select from several different investment options in order to save toward retirement. Most such plans operate through your employer's HR department, with deductions automatically made from your paycheck and deposited into your retirement plan account.

There are some minor differences among the three major types of employer plans, such as eligibility requirements before a worker can participate, the ability to take loans from the plan, and when any employer contributions to the plan vest. However, for the most part, employees can use any of these plans effectively to save for retirement.

Retirement plans for smaller employers

The other main thing that 401(k)s, 403(b)s, and 457 plans have in common is that they're more common among large employers. Small employers have choices that are easier in some ways to implement.

For instance, the SIMPLE IRA is available to employers with 100 or fewer employees, and rather than forcing employers to handle the administrative functions of a more formal retirement plan, SIMPLE IRAs allow the financial institutions that help establish them to handle most of the details. Moreover, the federal government offers tax credits for up to three years to qualifying small businesses that set up SIMPLE IRAs for their employees. For employers, other benefits include lower costs and not having to file annual reports.

For employees, the SIMPLE IRA doesn't have contribution limits that are as high as 401(k)s and other similar plans. However, the advantage the SIMPLE IRA offers is that participants can typically choose a wider array of investments, and contributions are always 100% vested immediately upon their deposit into the account.

Entrepreneurs and retirement plans

For self-employed individuals, setting up a more formal retirement plan can be a hassle. The SEP-IRA is one way that the self-employed can save for retirement.

As you see in the table above, SEP-IRAs don't allow employee contributions. However, as a self-employed individual, you act as both the employer and the employee for retirement plan purposes. An SEP-IRA lets you contribute up to 25% of your net eligible employee compensation, up to a maximum of $53,000. As with the SIMPLE IRA, the SEP-IRA offers nearly unlimited investment flexibility, and it comes with simple administrative requirements and no additional reporting requirements.

Taking advantage of retirement plans is a smart thing to do. Between employer plans and traditional and Roth IRAs, you can tailor your retirement savings strategy to optimize your long-term investing prospects and put yourself in the best possible position to retire comfortably.

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