Investing for Retirement
Beyond investing in IRAs and 401(k)s.
457 Plan
This is a nonqualified retirement plan, which is meant for high-earning employees whose contribution to government-sponsored plans is capped. These plans are established mainly by tax-exempt state and local governments. Employee contributions are salary deferred, so you’re not taxed on the money until you withdraw. The caps and limitations are like those of the 401(k).
529 Plan
This is a qualified tuition program (meaning it has tax benefits) that lets you set up a college savings account by contributing to an investment plan provided by a plan manager. Another kind of 529 lets you “prepay” tuition either to a specific educational institution or to a plan that offers a list of eligible options. The maximum amount you can put into a 529 is $11,000 per year. Often only residents of the state in which the plan is offered are eligible for the prepaid plan. There are no income restrictions, the gains are tax-exempt, and the assets belong to the donor so they won’t have much effect on financial aid. Your investment options in both the savings account and the prepaid tuition are usually limited, however, and the plan’s existence is only guaranteed though 2010.
Corporate Pension Plan
This plan involves an employer agreeing to fund -- to some degree -- an employee’s retirement. Because they’re very expensive for companies, many employers are replacing their pension plans with 401(k)s.
Coverdell Education Savings Account (formerly the Education IRA)
It’s really a savings plan where your contributions can grow tax-deferred, rather than a retirement account. Parents can make nondeductible contributions to an account for their kids’ educations (even if they’re not yet born) until the kids turn 18. Unlike the 529 Plan, there’s an income cap for eligibility: Couples who jointly earn more than $220,000 per year aren’t eligible. There are also caps on how much a person is allowed to contribute. That cap is based on the contributor’s income. Distributions can be made for elementary, secondary, or postsecondary education.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)
This plan is similar to a 401(k) and is available to self-employed individuals and people who work for companies with fewer than 100 employees. Employees are allowed to make salary-deferral contributions, so they don’t get taxed on the cash until they withdraw it. The dollar limit that you can contribute is $10,000, plus cost-of-living adjustments. The employer also makes dollar-for-dollar contributions up to 3 percent of your salary or a contribution equal to 2 percent of each employee’s income -- whether the employee is putting in any money or not.
Simplified Employee Pension (SEP)
This is the same as the SIMPLE plan, but the employer isn’t required to make any contributions to employees’ accounts. SEP contributions are actually deposited into a traditional IRA. SEP IRAs are subject to similar rules, regs, and caps as a traditional IRA. Employers offering an SEP may, but are not required to, match your contributions up to $44,000 or 25 percent of your eligible income up to $220,000 in 2006. (up to $220,000 in 2006).
Spousal IRA
This is the same deal as the traditional and Roth IRAs, but this account is set up by a spouse whose husband or wife doesn’t have much income. The regulations and limitations are the same as they are for a regular IRA.