Defined-Benefit Plan (Pension)
A Defined-Benefit Plan is a plan where the employee benefits are calculated using a formula that considers several factors such as length of employment and salary history. The employer manages the underlying investments and risk and will usually hire an outside investment manager to do this. Typically an employee can not withdraw funds. At a certain point, the employee becomes eligible to receive a monthly payment for their lifetime. These plans typically offer survivor benefits. Payments received in retirement are considered ordinary income for tax purposes.
401(K) Plan
401(K) Plans are the most popular employer-sponsored retirement plans in America. It’s a defined contribution plan. Which means the employee has access to a pool of money at retirement to pay for their expenses. As a qualified plan it is eligible for special tax benefits. Your contributions are tax-deductible. Your withdrawals at retirement are considered ordinary income for tax purposes. You can invest a portion of your paycheck up to the annual limit and in most cases your employer will match a portion of your contributions. You typically can’t withdraw funds until age 59 ½ without a 10% early-withdrawal penalty. There are no income restrictions, only contributions limits. Some employers offer a Roth 401K Plan that allows you to contribute after-tax dollars. These accounts offer tax-free withdrawals at retirement when certain minimum conditions are met.
2025 Contribution Limits
- <Age 50 = $23,500
- Age 50+ = $31,000
- Age 60-63 = $34,750
- Employee + Employer Contribution Max = $70,000*
* additional $7,500 employee contribution if Age 50+, or $11,250 employee contribution if Age 60-63
403(B) Plan
A 403(B) Plan is a defined contribution plan for certain employees of public schools and tax-exempt organizations. These plans are typically for teachers, school admins, professors, government employees, nurses, doctors, and church employees. The 403(B) plan resembles a 401(K) plan. There are no income restrictions and the withdrawals are considered ordinary income for tax purposes. With a 403(B) Plan you can typically invest in mutual funds and/or annuities. Tax penalties and penalties for early withdrawal may apply if funds are drawn prior to age 59 1/2.
2025 Contribution Limits:
- <Age 50 = $23,500
- Age 50+ = $31,000
- Age 60-63 = $34,750
- Employee + Employer Contribution Max = $70,000*
*additional $7,000 employee contribution if Age 50+, or $11,250 employee contribution if Age 60-63
Savings Incentive Match Plan for Employees (SIMPLE)
A SIMPLE IRA is a plan that most small businesses with less than 100 employees can use. An employer can choose to a make a non-elective contribution of 2% of the employee’s salary or dollar-for-dollar matching up to 3% of their salary. These plans are easy to setup and the fees are considerably less than a 401(K) Plan. The contributions are tax-deductible and the withdrawals are considered ordinary income for tax purposes. Tax penalties and penalties for early withdrawal may apply if funds are drawn prior to age 59 1/2.
2025 Contribution Limits:
- <Age 50 = $16,500
- Age 50+ = $24,000
- Age 60-63 = $27,750
Simplified Employee Pension (SEP) IRA
A SEP is an IRA that is typically set up for an employer or self-employed person. Contributions by the employer are tax deductible and are on a discretionary basis. The key difference with a SEP compared to an IRA is the annual contribution limits for the SEP are higher. The start-up and operating costs for a SEP are less than traditional employer-sponsored retirement plans. Withdrawal are considered ordinary income for tax purposes.
2025 Contribution Limits:
- the lesser of 25% of compensation or $70,000
* For additional information about the plans above and other plans available, please visit the IRS page here.