US Retirement Plans

In the US , there is a proliferation of "qualified" plans (versus "registered" plans in Canada ) that are available for you to save for your financial independence.  The rules surrounding these plans are amazingly complex and there are experts that deal in nothing but setting up and administering these types of plans.  There are rules on how much you can defer each year and penalties if you take it out too soon.  There are rules on when you must start taking funds out and different rules in the event of your death.  Which plan you use depends on your individual goals and objectives and what you are trying to accomplish.  You may also be able to contribute to an IRA in addition to the qualified plans listed below.  Following is a brief description of the most popular plans:

401(k) Plan - Is by far the most popular retirement plan in the US . Its unusual name is due to that particular section of the Internal Revenue Code that permits these plans.  These plans are used by most corporations and considered a "defined contribution" plan that defines how much you can put in (you bear the investment risk versus a defined benefit plan - see below). These plans allow you to defer some, or all, of your salary pre-tax, with the company matching a portion of it.  The limits on the amount you can defer in a 401(k) plan change but for 2007 the amount is $15,500 (plus another $5,000 if you are over the age of 50).  If you leave your employer, you are able to roll your 401(k) plan into a Rollover IRA but you should seek advice before doing so as it can be tricky and there are some opportunities to take advantage of.

403(b) Plan - These plans work similarly to a 401(k) but are used primarily by non-profit organizations (like some hospitals) and schools.  The administrative expenses associated with these plans are higher but they still offer a good opportunity to defer income in a tax-deferred environment.  Again, its unusual name is due to that particular section of the Internal Revenue Code that permits these plans.

457 Plans - Used primarily by State government employees.  There is usually some form of matching by the State but it obviously varies by State.

Defined Benefit Plans - Unlike the plans outlined above that define the amount you contribute to the plan each year (you bear the investment risk), defined benefit plans specify how much must be contributed to produce a defined benefit at a certain age.  Recent law changes have made these plans very attractive in certain situations with large amounts of income to be deferred each year. 

SEP-IRA, SIMPLE Plan - These are used primarily by self-employed individuals, are easy and inexpensive to administer.