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Masterminding Your Retirement
Employer-Sponsored Retirement Plans
Dear Jeff:
I work for a company without any kind of retirement plan. I have a Roth IRA and contribute the maximum each year, but keep hearing about 401(k), 403(b), Keogh, SEP and SIMPLE, which allow you to invest much more each year. Can I use them instead?
Jeff Says:
Higher contribution limits certainly do make the other plans you mention more attractive than IRAs, especially for those participants who are trying to maximize their retirement savings. Unfortunately, these plans are employer-sponsored, which means that they must be established by the employer. Individual employees may then participate in their company's plan after satisfying the eligibility requirements. In most cases, eligibility is dependent upon the participant's age, years of service, and hours of service rendered per year, all of which are determined by the employer when the plan is initially established.
The "employer-sponsored" issue makes sense when you consider that the employer may actually make part or all of the contribution to the plan. For example, profit-sharing plans, an example probably familiar to most, allow for a discretionary contribution by the employer. An SEP, or Simplified Employee Plan, works similarly except that employer contributions go directly into a segregated account of the employee.
The 401(k), SIMPLE IRA401(k) and 403(b) plans allow each eligible employee to contribute his or her own earnings to the plan as well. There are limits to the amount of employee contributions but, as a general rule, they are substantially higher than IRAs.
Two final points: Tax-sheltered annuities or 403(b) plans may only be established by tax-exempt employers such as hospitals and schools, and finally, Keogh is just the name for a retirement plan for unincorporated individuals.
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