Employee Retirement Plans

Employee retirement plans have replaced pensions as the dominant form of retirement savings and income. Several types of employee retirement plans are tax advantaged or sheltered from taxes. The most common tax advantaged employee retirement plans are the 401K, 403B, IRA and SEP.

401Ks

The 401K plan is named after the section of the Internal Revenue Service tax laws that make this type of plan legal. Money put into the 401K is deducted from the individual's taxable income. The money is taxed when withdrawals are taken after age 59 _. If someone takes money out of the account before 59 _, both income taxes and an additional 10 percent penalty are owed. Employers can choose to contribute a percentage of the employee's salary to the 401K.

Employer contributions are not taxed until taken out in retirement.

403Bs

The 403B plan is also named after a section of American tax law. The 403B is offered by non-profits and some government organizations. Public school teachers, non-profit employees and employees of religious organizations contribute to a 403B, not a 401K.

It is legal to contribute the maximum to both an IRA and a 401K or 403B.

Individual Retirement Accounts

Individual Retirements Accounts or IRAs were created for people who do not work for an employer that offers a 401K but need to save for retirement. Roth IRAs are funded with after-tax money. When money is taken out of a Roth at retirement, no income tax is owed. Traditional IRAs are funded with pre-tax money, reducing the amount on which the individual has to pay income tax. However, funds from a traditional IRA are subject to income tax when withdrawn.

Take out the principal contributions put into a Roth IRA penalty free to pay for a first home or educational expenses.

SEP

A Simplified Employee Pension Plan or SEP is made available to owners and employees of small businesses. The employer contributes to an IRA within the SEP instead of setting up a pension plan. One of the greatest advantages of a SEP is the contribution allowed, up to 25 percent of one's salary up to a $49,000 cap as of 2011.

Contributions to a SEP are deductible from the individual's self employment taxes.

The government has created several types of tax-sheltered and tax-deferred employee retirement plans. This was done to encourage personal savings and offset the decline of the private pension plan. Individuals who take full advantage of multiple retirement plans rest well in retirement.

Roth IRAs are funded with after-tax money