Saving for retirement is arguably the single most important financial endeavor most of us undertake. It takes initiative, planning and consistent saving and investing to create a nest egg to cover a retirement that could stretch two or more decades. No matter where you work or how much you earn, it’s important to start saving as early as possible to take maximum advantage of compounding, which can harness the power of time to increase the value of your money.
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There are numerous types of retirement plans and, over the course of your working life, you might find yourself accumulating savings in a number of accounts. For instance, you might start with a job that doesn’t offer a retirement plan and contribute on your own through an individual retirement arrangement (IRA). Later, you might find yourself working for an employer that offers a 401(k) plan. And perhaps later still, you might become self-employed and put money into a Simplified Employee Pension (SEP) using a SEP IRA.
Retirement plans vary considerably in terms of the investments offered, the amount you can contribute and other factors. That said, most retirement plans share some similar features.
Tax Advantages. Retirement plans tend to give participants tax benefits that non-retirement accounts don't offer, such as reducing your current taxable income in any given tax year, allowing for tax-deferred or tax-exempt growth, or some combination.
Control. Unlike pension plans, which are increasingly rare, you control how much you contribute to your employer-sponsored retirement account or IRA and, given the choices available to you through an employer plan, where to direct your contributions.
Fees. Retirement plans and IRAs come with a variety of fees that, like the fees and commissions of other financial products, have an impact on the overall performance of your retirement account assets.
Contribution Limits. The IRS sets annual contribution limits for retirement plans. Limits are increased periodically due to inflation, though not every year. In some 457 plans and the Thrift Savings Plan (TSP), there are a few circumstances when you can contribute above the annual limits. In addition, the maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your income.
Catch-Up Contributions. Participants age 50 or over at the end of the calendar year can, if permitted by a plan, make catch-up elective deferral contributions beyond the basic contribution limits. For more information, visit the IRS’s Catch-Up Contributions page.
Matching Contributions. Although not required to do so, many employer plans offer matching contributions—in other words, a dollar for every dollar you save, up to a preset limit (which might be a dollar threshold or a percentage). IRS rules require that all matched funds reside in a pretax account.
Automatic Features. A growing number of plans offer one or more automatic features that require no action from the participant. An increasingly common feature is automatic enrollment, where employees are enrolled at a preset contribution rate and are also automatically enrolled into a preselected investment fund. The default investment will likely be a lifecycle fund, a balanced fund or a managed account, which the federal government has approved as acceptable choices.
Who Regulates Retirement Plans?
If your employer both offers and contributes to an employee retirement plan (for example, by matching a portion of your contributions), then you’re part of a plan that follows rules laid down in the Employee Retirement Income Security Act (ERISA). All ERISA plans are regulated by the Department of Labor (DOL).
ERISA requires plans to provide participants with plan information including plan features and how the plan is funded. ERISA plans also provide fiduciary responsibilities for those who manage and control plan assets and give participants avenues to pursue grievances, including the right to sue for benefits. Most plans offered by private sector employers are ERISA plans.
If your employer offers a retirement plan but doesn’t make contributions, it’s a “non-Erisa plan” and regulated by the IRS. Many, but not all, 403(b) plans fall into this category. IRAs are also regulated by the IRS.