Employers are not required to offer retirement plans to their employees. However, many offer these plans as an employee benefit. An employee retirement plan that is "qualified" under certain federal laws (such as the Employee Retirement Income Security Act, or ERISA) offers tax benefits to both employers and employees. Popular employee retirement plans include 401(k) plans, IRAs, and pension plans.
Under a 401(k) plan, an employee contributes a set amount or percentage of each paycheck, pretax, to an account. Some employers match all or part of employee contributions; others don’t. Neither you nor your employer has to pay taxes on these contributions. They are taxable to you only when you withdraw the money from your account.
You may invest the money in your account. Many employers offer a limited menu of investment options, often mutual funds. If your 401(k) investments earn money, you are not taxed on these earnings as long as the money remains in your account.
You may start withdrawing money from your 401(k) when you turn 59 ½. When you take money out of your account, you will have to pay ordinary income tax on the amounts you withdraw. The IRS imposes a tax penalty on any withdrawals you take before age 59 ½, unless an exception applies.
You cannot open an individual 401(k) plan; only employers can create them.
Like 401(k) plans, traditional individual retirement accounts (IRAS) offer tax benefits. You can subtract the amount you contribute to an IRA from your taxable income, and the money your investments earn remain tax-free until you start taking withdrawals after you retire.
The rules are different for Roth IRAS: You can’t subtract the amount you contribute to a Roth IRA from your taxable income. However, that money grows tax-free, and you don’t have to pay tax on your withdrawals.
If you change jobs, you can open an IRA and transfer your 401(k) assets to an IRA account. Different types of IRAs come with different rules. The brokerage or other financial institution that sets up your IRA can explain your options and help you choose the right one for you.
Under a pension plan, your employer offers you the equivalent of a salary after you retire. Some pension plans are “defined benefit” plans, which means you are guaranteed a particular amount each year. More common, especially these days, is the “defined contribution” plan, to which your employer must contribute a set amount each year, but the amount you receive as a pension will vary depending on how those investments do.
Your employer is required to contribute regularly to make sure that there is enough money in the account when it comes time to pay you. You may or may not be required to provide our own contribution.
Some retirement plans, such as 401(k) plans and pensions, are administered by the employer or an organization associated with the employer. In this case, the employer must meet ERISA standards in order to enjoy tax benefits. Under ERISA, your employer must provide you with information about your plan and your employer's administration of the plan, among other things. This is to prevent your employer from mismanaging your assets.
An Employment Lawyer Can Help
If you don’t understand the retirement benefit options available to you, or you believe your employer has done something illegal (like failing to contribute to a plan as required or refusing to pay your benefits when they come due), talk to an experienced employment lawyer.