WHAT ARE EMPLOYER RETIREMENT PLANS?
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retirement plans are exactly what their name suggests: Offered by your
employer, these investment plans help you accumulate money that can provide you
an income in retirement. Most retirement plans are authorized under
sections of the Internal Revenue Code?for example, section 401(k) or 403(b)?and
all enable you, your employer, or both, to contribute to various investments for
your retirement. You do not pay taxes on the earnings until you withdraw
funds from the account.
Employer retirement plans permit you and/or your employer to
annually contribute larger amounts toward your retirement than are possible with
an individual retirement account (IRA). The plan is tied to your
employment, so employer contributions cease when you leave the organization,
although you usually can roll the investment over into an IRA or other
One advantage of some employer retirement plans is that you can
contribute pre-tax dollars to these investments. This enables you to lower
your current income for tax purposes and defer taxes until you withdraw funds
when you retire and when you may be in a lower tax bracket. There are no
finer tax shelters available to employees.
Each type of employer retirement plan offers its own
special features, rules, and maximum annual contributions. The next section
explains some of these differences.