By Jon L. Ten Haagen
I am being offered the opportunity to participate in my company’s defined contribution plan.
The plans come in different forms and sizes, so you should take some time to be sure you are getting the proper plan. The defined contribution plan that you participate in depends on where you work.
· A 401(k) is offered at public and private companies and for not-for-profit organizations. The features are annual contribution limits and vesting rules. You can transfer the balance from your previous plan to a new plan. Tax-free ROTH versions of their traditional tax-deferred plans.
· 493(b) plans are designed for not-for-profit organizations (schools and medical facilities). They have annual contribution limits and vesting rules. You can transfer the balance from your previous plan to the new plan. There may be expanded opportunities to make up catch-up contributions. Tax-free ROTH versions of their traditional tax-deferred plans.
· Section 457 plans are for state and municipal workers. Annual contribution limits and vesting rules. You can transfer the balance from your previous plan to a new plan. Expanded opportunities to make catch up contributions.
· A thrift savings plan is for federal employees and at some public and private companies. It has annual contribution limits and vesting rules. You can transfer the balance from your previous plan to the new plan. Tax-free ROTH 401(k) plus their traditional tax-deferred plans
· SIMPLE IRA or 401(k) plans offered at public and private companies with no more than 100 employees. Matches are mandatory. Simple IRAs have lower contribution limits than other plans.
· Profit-sharing and money purchase plans are offered by public and private companies, including those with no more than one or two employees. Contribution limits are higher than with most other plans. Money purchase but not profit-sharing plans require annual contributions. Assets can be rolled over to an IRA.
With all these retirement plans, you can move your money to a new plan or IRA if you leave your employer. Speak with a knowledgeable investment or tax advisor to make sure you do the transfer correctly. The IRA rules have changed so you can only do one transfer a year if it is not a trustee to trustee move.
Today, more and more companies are making it mandatory for new employees to be automatically enrolled in their retirement plan. If you do not want to participate in the employer plan, you can opt out in writing.
If your employer offers a retirement plan with a match – meaning, it will match your contribution up to a certain percentage – this is a no-brainer. It is free money and you should strongly consider signing up.
With a retirement plan, you are usually responsible for choosing the investments from a menu your employer offers. If the company does not offer a match and if the investment choices do not have a very good track record to offer you, then you might consider going outside the company and considering ROTH IRA in which you can choose your own investment.
As always, I strongly suggest you consult with an experienced and knowledgeable certified financial planner to help you make one of the most important decisions for your financial future.
We wish you a healthy, happy and prosperous New Year.