Retirement Basics
An egg and money in a bird's nest with at $1 bill in the background
Workplace retirement plans help you save

Maybe you're in a high-flying corporate career, or you've dedicated yourself to nonprofit work, teaching or caring for the sick.

Whatever your job, no doubt it reflects your interests and skills. It's also where you likely can prepare for retirement.

401(k) plans

Most private sector employers offer participation in 401(k) plans for good reason. They come with various tax breaks that help workers amass handsome savings over time.

This year, individuals can stash up to $15,500 of pre-tax earnings in a plan, and those who are 50 or above can save $20,500. Assets grow tax-deferred, meaning you don't pay the IRS until you cash out of your 401(k). This enables capital gains and dividends to be reinvested, thereby maximizing growth.

The best part about 401(k) plans? Employers usually contribute to them on behalf of employees. This year, the limit on combined contributions from employers and their workers is $45,000 per individual, or $50,000 for those 50 and older, not to exceed 100 percent of a worker's total compensation.

Now for the fine print:
  • You can borrow from a 401(k), though pros generally advise against it.
  • It's also expensive to tap a 401(k) before age 59½ since you'll generally owe a 10 percent penalty for withdrawals.
  • Hardship withdrawals may be permitted penalty free for dire financial situations, but taxes will be due nonetheless.
  • With few exceptions, you must take minimum required distributions from the account by age 70½.
  • If you leave your job, you can generally roll your 401(k) into a new employer plan or into a rollover IRA.

403(b) plans

Offered to employees at schools, museums and other nonprofits, 403(b) plans have long resembled 401(k) accounts with some notable shortfalls. But thanks to new rules passed in July 2007, 403(b) plans are undergoing significant changes.

Individuals will continue to fund 403(b) plans with pretax earnings, up to $15,500 per person in 2007 and $20,500 for those 50 or older. Earnings grow tax-deferred. It's not common for employers to contribute to a 403(b) on behalf of workers. Moreover, 403(b) plans have been criticized for being riddled with hefty fees and for being heavily invested in annuities that don't generate enough income for individuals to amass adequate wealth.

Another problem: Picking investments can be difficult. That's because it's common for several vendors to manage 403(b) plans within a single school district. That can be overwhelming for workers, who must make myriad choices without guidance from employers.


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