The end of the school year is only weeks away. Many students are getting ready to graduate and jump into a career. Upon starting a career there is a lot of information you need to be knowledgeable on such as work culture, vacation policies, and salary! Another important aspect of your future career that may get overlooked your company’s employer sponsored retirement plans. An employer sponsored retirement plan is when both an employer and an employee make contributions into a retirement specific account each month. The contributions are invested on behalf of an employee, who may begin to make withdrawals after retirement. Traditional employer sponsored retirement plans fall into two categories, defined benefit plans and defined contribution plans.
Now that we’ve defined what an employer sponsored retirement plan is and the categories they fall into, let’s jump into the most commonly seen plans.
401(k) Plan
The traditional 401(k) Plan is the most common employee sponsored retirement plan today. It is a defined contribution plan that is mostly funded by the employee, but often times offers at least a partial employer match. Features of the 401(k) plan include total control of funds for the employee to invest in until retirement and tax deductible contributions the year they were contributed. This means the all earnings in the 401(k) plan will accumulate on a tax deferred basis until distributions are taken out at retirement. At this point distributions will be taxed as ordinary income. Annual contributions for 2016 are limited to $18,000, with a catch-up provision of an additional $6,000 for those who are at 50 and above. Early withdrawals (before age 59 ½ ) will face a 10% penalty, and will be taxed as ordinary income.
Defined Benefit Pension Plans
A defined benefit pension, also called a traditional retirement plan provide a fixed monthly payment at retirement for an employee. In a defined benefit pension plan employees are not responsible for making any contributions because the employer will supply all funds. Because of this, employers will make all investment decisions and have complete control over the funds contributed until the employee reaches the plans retirement age.
403(b) Plan
The 403(b) works almost identically to the 401(k) Plan but it is specifically intended for non-profit organizations. So teachers and health care professionals listen up! The plans are funded mostly by employees, and those contributions are tax deductible when made. Employers usually match these contributions up to a certain percentage. Contributions percentages are very similar to a 401(k) plan and investment earnings accumulate on a tax deferred basis.
The retirement plans we highlighted are just a few of the most commonly seen plans offered. Other plans include the Savings Incentive Match Plan for Employees Plan, Simplified Employee Pension Plan and the 457 Plan.
If you would like more information on the plans we discussed or have any other questions regarding retirement plans and contract negation, Powercat Financial Counseling is here to help! Schedule an appointment at http://www.k-state.edu/pfc/ to see one of our knowledgeable Peer Financial Counselors.
Brett Zapletal
Peer Counselor I
