Simply Junior

There are different types of retirement plans – government-sponsored plans, personal plans, annuities and employer-sponsored plans.

What’s the point of knowing all these plans?

This is because your employer’s retirement savings plan is important for your future financial security. You should understand how your plan works and what benefits you’ll receive. And it’s in your best interest to keep track of your retirement benefits too.

Let’s look at these different types of retirement plans.

Government-Sponsored Plans

Social Security plan is the best example in this category.

Personal Plans

Individual Retirement Agreement or IRA is the most well-known example. They can come in different types according to their tax treatments.

Annuities

These are contracts established with an insurance company. They can be fixed and variable annuities .

Employer-Sponsored Plans

2 types – qualified and non-qualified retirement plans.

Qualified Retirement Plans

These plans meet the Internal Revenue Code (IRC) requirements and the Employee Retirement Income Security Act of 1974 (ERISA) requirements.

They offer several tax benefits such as allowing employers to deduct annual allowable contributions for each participant of the plan; contributions and earnings on those contributions are tax-deferred until each participant withdraw them and each participant can even further defer some of the taxes through a transfer into a different type of IRA.

You can go for these qualified plans:

(A) Defined Benefit (DB) Plans

These are company retirement plans like pension plans, in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk.

The employee, the employer, or both may contribute to the plan.

Examples of DB plans:

1. Pensions

They’re a type of retirement plan that guarantees a specific amount to be paid out to the employee when he/she retires. The amount is calculated based on an employee’s salary, years of service and a fixed percentage rate.

The Pension Benefit Guarantee Corporation (PBGC), a federal agency, covers employer-sponsored pension plans.

Eligibility for the plan depends on a company’s policy. Some companies require their employees to serve for a certain period of time before they can become eligible for a pension plan. If an employee leaves the job, the pension plan stays with the previous employer.

2. Annuities

They’re retirement plans that have fixed monthly payments at the age of retirement. You can’t transfer the annuities into an IRA account, hence the amount is taxed as regular income the year you receive it.

(B) Defined Contribution (DC) Plans

These plans allow the employer and/or employee to make contributions, so that the final benefits depend on how much is in the account and the rate earned by the account’s investments. Each participant needs to set up his/her own individual account in the plan.

The government doesn’t guarantee a participant’s pension benefits. Instead, the plan allows employees to decide on the investment, based on the employer’s options.

Some examples of DC plans:

1. Profit Sharing Plan

It allows an employer each year to determine how much to contribute to the plan (out of profits or otherwise) in cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants.

2. 401k Plan

An employee can make contributions from his/her paycheck before taxes are taken out. The contributions go into a 401k account, with the employee often choosing the investments based on options provided under the plan.

In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage.

3. Employee Stock Ownership Plan (ESOP)

The employer contributes shares of the company’s stock to employees in return for special tax benefits.

4.Stock bonus plan

It’s a type of profit sharing plan, where contributions are made in the form of company stock.

Non-qualified Retirement Plans

These plans don’t meet the IRC or ERISA requirements. Employers fund these plans. They’re more flexible but don’t have the tax benefits qualified plans have. Upon your retirement, your employer pay you the benefits (in the form of annuities) which are taxed as ordinary income tax, or in lump sum payments, which you can transfer into an IRA to defer taxes.

An example is the 457 plan.

This plan aims at state and local government employees of tax-exempt organizations. Your contributions and earnings are tax-deferred until you withdraw them.

Distributions start upon your retirement but you can also take distributions if you change jobs or if you’ve an emergency.You can choose to take distributions in one lump sum, in annual installments or as an annuity. Distributions are subject to ordinary income taxes and you can’t transfer the amounts into an IRA.

We all pay for taxes. But smart people pay less.

How can this happen? Of course, if you do not report your income to the tax department, then you would not be taxed. This will exempt you from paying your taxes. However, it can also very well land you in the jail or heavy penalties if you are caught. For you to know, this is the illegal way to reduce taxes.

There is a way to reduce taxes legally. You just have to put in some extra effort and time. Considering that, these effort can serve you well in other aspects of life too. For example, saving for a retirement account. Everyone needs to plan for their retirement. When people stop working at the age of 55, for example, they would need a big amount of money to sustain their remaining years of living. But what if you are not interested in saving for your retirement at all? What if I tell you can reduce your taxes you will be paying for 20 to 30 years of your life? Then saving for a retirement account does not sound so bad after all, does it?

In order to do this, you need to know how to count your taxes properly. How is this done? It is simple. Add up your federal and state marginal tax rate. If the rate is something like 20%, then you should be happy. Why should you anyways? What if I tell you can reduce 20% of what you save in your retirement account? For example, you save $10,000 in your retirement account. You are entitled to get a tax reduction of $2,000! You can wash, rinse and repeat with this method, saving you from paying lots of taxes in the long run. Besides, saving for the rainy day (after retiring) is always a smart move.

Do not fall into the habit of spending too much of your income. Most of the time, there is nothing left to save. Control your expenditure so you can save for this retirement account of yours.

But what if your employer or company does not support this retirement plan? Ask them of further support, especially from the human resource departments. If you get rejected, then you might want to consider getting a new boss!

As for married couples, they pay even less tax, when saving up for their retirement account. The way you calculate this exemption rate is to know the adjusted gross income (‘AGI’).

Is your employer offering disability retirement plans? If yes, then you’re lucky. In general, employers are not required to offer the said plan. The nice thing about disability plans is the benefits it will give to the employees who become disabled while in service. It’s really good if your employer is open about having disability retirement plans for you and your colleagues. You will never know what will happen to your physical health. There are lots of uncertainties in the workplace. What if you meet an accident while working? Your bright future will be doomed. Can you imagine yourself disabled and financially unstable? Although, service retirement plans are the common benefit plan offered to employees but it has certain requirements in order to avail the benefits.

Service retirement plan is a plan which provides employees with lifetime income. Employees should reach the age of 60 or 65 and have completed particular years of service with the company. People are very familiar with service retirement plans. The said plans are means of having a secured life after retiring as employees. The retiree can just relax and enjoy after working for how many years. However, you cannot tell what will happen until you reach the age of 60. We are not thinking here of negative situations but it’s better to be prepared in times of accidents. Disability retirement plans are just what you will need.

Unlike service retirement plan, the disability plan doesn’t have age requirement as long as the employee cannot perform his work due to injury or illness. The best thing the plan can do to you in case you’ve suffered injury is the money you’ll be receiving. After suffering from illness or injury, an employee is unable to do his task and that would mean no income. By applying for disability retirement plans, eligible employees will receive an income in his lifetime. The amount is commonly computed based on the highest salary received by a particular employee during his service with the employer.

The equivalent amount of income from the plan is up to 45% of the highest salary received. It’s not bad, right? At least, you will have an income even though you are not working anymore. In disability retirement plans, you must first be eligible in the program. An employee cannot easily apply. The said plan is intended for disabled individuals. Actually, there are two kinds of disability: short-term and long-term. In short-term disability, you will be benefited until your illness or injury heals. Bear in mind to apply right away. Sometimes, it takes weeks before your application is approved. Remember not to falsify the information required in the form.

There are cases when your application will be denied if you’ll declare falsified information. Regarding long-term disability, you will prove the extent of your disability. It must be severe so you will be entitled to long-term payments. Prove to them that you are really disabled and needs financial assistance in order to make ends meet. Disability retirement plans are a way of relief to disabled employees. It gives them hope regarding financial matters.