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

401(k)
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 Income taxes are owed on money that’s withdrawn.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).

403(b)
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 403bwise.com, 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.

457
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.”

Plans for Individuals

SEP IRA
How they work: You invest after-tax money into a Roth but earnings grow and are taken later tax-free.

Contribution limits: Individuals can save up to $4,000 in 2007. If you’re 50 or older, you can stash an additional $1,000.

Income eligibility requirements: Eligibility phases out between $99,000 and $114,000 for single tax payers and between $156,000 and $166,000 for married couples filing taxes jointly.

Warnings: You must wait until you’re 59½ to withdraw from a Roth IRA or you’ll owe a 10 percent penalty. However, unlike other IRAs, you can leave assets untouched as long as you want, says Ed Slott, a CPA and editor of www.irahelp.com.

Who they’re for: Anyone who meets the income requirements to participate. Roth IRAs often are used by individuals who have maxed out their 401(k) plans and need another way to save for retirement.

Deductible IRA
How they work: Contributions are made with after-tax dollars, and individuals claim a tax deduction for their contributions. Earnings grow tax-deferred and are subject to income taxes when they’re withdrawn.

Contribution limits: Individuals can save up to $4,000 in 2007. Those who are 50 or older by the end of the year can put away an additional $1,000.

Income eligibility requirements: There’s no income limits to participation unless you’re enrolled in a company retirement plan. If you are covered by a company plan, eligibility for full contributions phase out for single tax payers with an adjusted gross income between $52,000 and $62,000.

For married couples filing a joint tax return (and who are both covered by a company plan), the phase-out is between $83,000 and $103,000. The phase-out requirement for a non-working spouse who files a joint return with a working spouse covered by a company plan is $156,000 to $166,000.

Warnings: You will owe a 10 percent penalty if you cash out before age 59½. You also must begin withdrawing money by age 70½.

Who they’re for: Anyone looking for tax-friendly opportunities to save but who isn’t covered by a company plan or doesn’t qualify for a Roth. Individuals who think they’ll be in a lower tax bracket in retirement may consider these, too.

Non-deductible IRA
How they work: Contributions are made with after-tax money and earnings grow tax-deferred until they’re withdrawn, at which point they’re subject to income taxes.

Contribution limits: $4,000 per individual in 2007 with an additional $1,000 “catch up” contribution for those 50 or older.

Income eligibility requirements: None.

For married couples filing a joint tax return (and who are both covered by a company plan), the phase-out is between $83,000 and $103,000. The phase-out requirement for a non-working spouse who files a joint return with a working spouse covered by a company plan is $156,000 to $166,000.

Warnings: You’ll owe a 10 percent penalty if you withdraw money before age 59½. You also must begin withdrawing money by age 70½.

Who they’re for: Anyone, but those who make too much to use a Roth IRA or deductible IRA should consider them.

Plans for Small Business Employees and the Self-Employed

SEP IRA
How they work: Contributions are made by the employer with pre-tax dollars and earnings grow tax-deferred. You pay income taxes upon withdrawal on original contributions and earnings.

Contribution limits: For 2007, up to 25% of compensation, but no more than $45,000.

Income eligibility requirements: Employees who earn less than $500 maybe excluded. However, if you open a plan for yourself, you must offer the plan to all other eligible employees who’ve worked for any amount of time in three out of the last five years.

Warnings: You’ll owe a 10 percent penalty if funds are withdrawn before you’re age 59½. Likewise, minimum required distributions have to be made by age 70½.

Who they’re for: Small businesses, including self-employed individuals, sole proprietors or partnerships. Because workers don’t have to receive SEP contributions from their employer until they meet the three-year service requirement, the plans are great for small businesses who want to offer a retirement plan on a more effective basis, says Lesser.

Simple IRA
How they work: Contributions are made with pre-tax dollars, plus employers match savings in one of three ways. They can fund up to 3 percent of earnings every year. In certain years they can chip in between 1 and 3 percent of earnings. Or they can make non-elective contributions (that is, give money to an employee’s plan even if that worker doesn’t save) that are equal to 2 percent of a worker’s compensation. Contributions and earnings grow tax-deferred until withdrawn, at which point they’re subject to income taxes.

Contribution limits: Individuals can save up to $10,500 and those who reach age 50 by the end of 2007 can save an additional $2,500.

Warnings: You’ll generally pay a 10 percent penalty if funds are withdrawn prior to age 59½ and you must start cashing out by age 70½ or you’ll pay a 50 percent penalty on the required minimum distribution

Who they’re for: Self-employed individuals or small businesses with no more than 100 employees who earned more than $5000 in the preceding calendar year. Plans are ideal for self-employed business owners, including individuals, who want a flexible plan because contribution methods can be selected before the start of each year.

Solo 401(k)
How they work: Contributions are made by sole proprietors with pre-tax dollars and earnings grow tax-deferred. Income taxes on earnings and original contributions are paid when withdrawn.

Contribution limits: Up to $15,500 in 2007 plus an additional $5,000 for those who reach age 50 by the end of the year, plus an additional 25% of total compensation, up to $45,000 in 2007.

Income eligibility requirements: None.

Warnings: Those who withdraw funds before age 50½ will generally owe a 10 percent penalty. You’ll also pay a penalty if you fail to take a required minimum distribution by age 70½.

Who they’re for: Because it has far higher contribution limits than an IRA, the solo 401(k) is good for self-employed individuals with no employees who want to contribute a significant amount of money to a retirement plan.

Are you worried about having enough money to retire someday? Or, do you have a plan of action? Share your story

« Back to the Table of Contents

More From Bankrate