Financial Literacy 2007 - Retirement
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Basic elements of IRAs and workplace plans

Individuals, employees and the self-employed each have unique opportunities for contributing to retirement savings accounts. Take a look at the types of plans available for each group with a description for each.

3 paths to retirement planning
  1. Plans for employees -- Retirement plans commonly offered in a workplace.
  2. Plans for individuals -- Supplement retirement savings for individuals.
  3. Plans for the self-employed -- Plans commonly available to entrepreneurs.

Plans for employees

How they work: Earnings grow tax-deferred. Income taxes are owed on money that's withdrawn. Most employers also kick in contributions to 401(k) plans, matching savings up to a certain limit or percentage of an employee's salary.

Contribution limits: Individuals can save up to $15,500 in 2007, and those who reach age 50 by the end of the year can save an additional $5,000.

Income eligibility requirements: None

Warnings: Withdraw the money before age 59½ and you'll owe a 10 percent penalty on top of taxes. Likewise, you must cash out at age 70½ or you'll pay a penalty of the 50 percent of the minimum distribution amount.

Who they're for: Any wage-earner whose employer allows them to participate in their plan.

Roth 401(k)
How they work: Contributions to a Roth 401(k) are made with after-tax dollars. Earnings are not taxed.

Contribution limits: You can save up to $15,500 in 2007, plus an additional $5,000 for wage-earners who turn age 50 by the end of the calendar year.

Income eligibility requirements: None

Warnings: Cash out before age 59½ and you'll pay a 10 percent early withdrawal penalty. On the other hand, unlike a traditional 401(k), there's no age requirement to start taking out the money so you can leave it untouched indefinitely.

Who they're for: Lower-income employees who think they'll be in a higher tax bracket in retirement should consider the Roth 401(k).

How they work: Contributions are made with pre-tax dollars and earnings grow tax-deferred. Employers may chip in matching contributions but rarely do so, says Dan Otter, founder of, a Web site devoted to educating people about 403(b) plans

Contribution limits: Individuals can save up to $15,500 in 2007 and an additional $5,000 for those 50 or older. Employees who work less than 20 hours a week or who contribute less than $200 annually may be excluded from the plan.

Income eligibility requirements: None

Warnings: You'll pay a 10 percent early withdrawal penalty if you cash out prior to turning age 59½. However, there are exceptions that can be made to start taking distributions as early as age 55 penalty-free. You must start taking withdrawals at 70½.

Who they're for: Employees of schools and non-profit institutions.

How they work: Contributions are made with pre-tax dollars; earnings grow tax-deferred.

Contribution limits: You can save up to $15,500 in 2007. Individuals age 50 or older can make an additional $5,000 catch-up contribution. Special catch-up contributions also are available for certain long-term employees or for the last three years of employment prior to retirement.

Income eligibility requirements: None.


Warnings: You must start taking distributions by age 70½ or you'll pay a penalty. There is no penalty for taking distributions early but you must meet certain requirements to qualify for a distribution (such as an unforeseeable emergency or because you left your job). It's worth noting that 457 plans have attracted a lot of criticism in recent years for being overwhelmingly invested in annuities that have low returns and potentially high fees.

Who they're for: Government employees and those working for some non-governmental, tax-exempt organizations like many hospitals or churches. In non-governmental institutions, 457 plans are usually offered exclusively to highly-compensated or management employees, says Gary S. Lesser, a retirement plan consultant and author of "The 457 Answer Book."

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