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Retirement Planning
When taking a job, you may have several options in regards to retirement planning. These may come in the form of a 401k, 403b, Simple IRA or pension (keep in mind traditional pensions are not as common as they used to be). Below is vital information concerning the different retirement options you may be offered.
· 401k’s and 403b’s
o A 401k is an employer sponsored retirement savings plan that allows you to save for retirement while taking advantage of tax benefits. 403b’s are the same thing, however they are offered solely to public education organizations and some non-profits.
o A Traditional 401k or 403b allows you to make contributions from pre-tax dollars, thus decreasing your taxable income. A Roth 401k or 403b allows you to contribute post-tax dollars, meaning your investment grows tax free and your distribution is tax free (provided your contributions are 5 years old or you are at least 59 ½).
o Your employer may match the funds you contribute to your retirement. Example, your employer may match as much as 50% for the first 6% you contribute, or they may match dollar for dollar up to 5% (there are no legal limits on matching contributions). You cannot contribute more than $16,500 (2009/2010) per year into a 401k. Any matching funds you may receive through your employer do not count toward you contribution limits for the year. All matching contributions made by an employer will be traditional funds.
o Vesting is a security feature companies use to keep their workers. Vesting simply means that you must work for the company for x amount of time to fully take possession of the matching funds you have acquired. So if you should quit or be fired from your job before you are “fully vested” you may not be able to keep all of the matching funds you have earned up to that point. Your employer will have a vesting schedule that allows you to see how much will be vested based on the amount of time you put in at the company.
· Simple IRA (Savings Incentive Match Plan for Employees)
o A Simple IRA is an employer-provided retirement plan that allows employees to set aside money and let it grow for later use. This would be common if you worked for a smaller company, one will less than 100 employees.
o If your employer offers a Simple IRA, they must either match what you contribute dollar for dollar up to 3% or a flat 2% of compensation of individuals earning at least $5,000 in the year. If the 2% option is taken, employer contributions will be regardless of the amount you as an employee contributes.
o For a Simple IRA, all contributions are immediately 100% vested. If you quit your job tomorrow, you will receive 100% of the contributions your employer has made into your Simple IRA.
· Pension plans—defined benefit plan
o A pension is an arrangement to provide income to an employee when they are no longer earning a regular income from the employer. It is tax deferred savings that allows for tax-free accumulation of funds.
o Under the Pension Protection Act of 2006, employer contributions made after 2006 to a defined contribution plan must be vested at 100% after 3 years or under a six-year graded vesting schedule. Employee contributions are always 100% vested.
· Employee Stock Option Plan (ESOP)
o An employee stock option plan is granted to specific people in a company and they carry the right to buy certain amounts of shares in the company at a predetermined price. These are used a lot to compensate, retain and attract employees.
§ For example, you may be given the option to purchase 500 shares of stock at $5 per share. If they price of the share rises to $20 per share and you have not used your option yet, this may be a good time to do so.
o While ESOP’s can be a good thing, it is important to re-allocate your portfolio so that you do not become too heavily weighted in that company…case in point...Enron.