One of the best ways to reduce your tax liability is to open or add funds to a qualified retirement account. Your annual contribution will be excluded from your current income for tax purposes. These contributions as well as earnings are taxed as regular income when withdrawn. If taken prior to 59 1/2 withdrawals are subject to a 10% tax penalty.
Employer Sponsored Plans
- Defined Benefit Plan – provide a monthly benefit when you retire. Benefit depends on years of service as well as salary. These plans are typically funded by the employer. As time goes by these programs are becoming scarce.
- 401K – provided by private companies and are funded by the employee. Contribution limits do apply and if the contract stipulates, an employee may have the ability to borrow funds. Employers may also provide for a matching contribution.
- 403b – is commonly offered by schools, hospitals or 501(c)(3) tax-exempt organizations for the benefit of employees. Functionality is very similar to the 401(k).
- SEP’s Simplified employee pension plans – geared for small business retirement. Typically funded by the employer but the employee has the ability to contribute. SEP’s are held in employee IRA’s.
- SIMPLE Plans Savings incentive match plans for employees – is a type of tax-deferred employer-provided retirement plan that allows employees to set aside money and invest it to grow for retirement. It’s a type of IRA that offers simpler and less costly administration rules, as it is not subject to ERISA and its associated regulations. Also contribution limits are lower in comparison to other employer based retirement plans.
- Profit Sharing Plan – Is entirely funded by the employer. Upon retirement, the companies profits dictate the retirement benefit you receive.
ESOP Plan, employee stock ownership plan – employer contributes stock to the plan. Upon retirement the employee receives a single payment of stock shares. At age 55 with a minimum of 10 years of service, the individual must be given a choice of other investment options to diversify that account.