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Employee Savings Plan (ESP) Definition, Types, Tax Benefits

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

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Roger Wohlner is an experienced financial writer, ghostwriter, and advisor with 20 years of experience in the industry.

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What Is an Employee Savings Plan (ESP)?

An employee savings plan (ESP) is a plan provided by an employer that allows employees to set aside a portion of their pre-tax wages for retirement  savings  or other long-term goals, such as paying for college tuition or purchasing a home.

Many employers match their employees' contributions up to a certain dollar amount, or a certain percentage. A popular ESP in the U.S. is the 401(k) retirement plan, which offers four types of plans.

Key Takeaways

  • Employee Savings Plans (ESPs) are employer-sponsored savings and investment plans that allow employees to make contributions using pre-tax dollars.
  • 401(k) retirement plans allow employees to contribute up to $22,500 towards retirement for tax year 2023 and up to $23,000 for tax year 2024, with additional contributions made by employers, if a match is offered.
  • Employees 50 and older can make additional contributions known as catch-up contributions which can be up to $7,500 in 2023 and 2024.
  • Contributions to 401(k) plans are tax deductible; withdrawals are added to taxable income.
  • Health savings accounts (HSAs) are another type of ESP intended for health expenses.

Understanding Employee Savings Plans (ESPs)

Employees are always  fully vested  in their own employee savings plan contributions. However, many plans require that employees remain employed for a minimum amount of time before they are vested and eligible to withdraw employer-matched funds.

ESPs can be an attractive and relatively easy way for employees to lower their taxes and save for long-term goals. In fact, with the phasing out of corporate defined-benefit pension plans , ESPs are becoming the sole option for individuals to save for retirement through their employer.

Defined-Contribution Plans

ESPs mostly support saving for retirement and come in two main forms: defined-contribution plans offered by corporations (known as 401(k) plans ), and those offered by public or non-profit entities (known as 403(b) or 457(b) plans ). Contributions to both types of plans are made through payroll deductions that lower employees’ taxable income.

Many employers offer Roth versions of these plans. The employee's contributions to Roth accounts are made with after-tax dollars, so they don't reduce gross income. However, qualified withdrawals are tax free if certain conditions are met.

The money contributed to traditional 401(k) plans grows tax-deferred until funds are withdrawn in retirement and such distributions are included in taxable income.

For 2023, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $22,500. For 2024, that limit is $23,000. Those age 50 and over can add an additional catch-up contribution of $7,500 for both 2023 and 2024. Employer matching contributions do not count against this total.

Employers can match an employee's contributions to a Roth 401(k) or Roth 403(b) plan. However, these contributions go into the traditional version of the plans, meaning they are subject to taxes when the funds are withdrawn.

Other Key Components

Defined-contribution plans also offer portability, meaning an employee who switches jobs can either roll over their plan balance into an identical plan at their new employer or transfer the balance into an individual retirement account (IRA) that they maintain on their own.

Assets in a personal IRA also grow tax deferred until withdrawn. IRAs have lower annual contribution limits than 401(k) plans. For 2023, individuals can contribute up to $6,500 to an IRA, or $7,500 if age 50 or over. For 2024, the limit is $7,000, or $8,000 if age 50 or over.

Health Savings Account

A Health Savings Account (HSA) is another example of an ESP. These tax-advantaged accounts allow individuals with  high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual's employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision, and over-the-counter drugs.

Less Common Employee Savings Plans

In addition to or in place of defined-contribution plans, some employers offer profit-sharing plans in which the employer makes an annual or quarterly lump sum contribution into a tax-deferred account that could be a 401(k).

Non-qualified deferred compensation plans, though less common, are another way for highly compensated employees to save for retirement or other financial goals. These plans allow participants the opportunity to make pre-tax contributions up to 100% of their annual compensation but are typically reserved for a limited number of high-earning employees within a company.

They offer greater flexibility than defined-contribution plans in terms of withdrawals for college or other non-retirement goals but do not carry the same protections as qualified plans.

What Is an ESP?

The Employee Savings Plan, or ESP, is a savings plan offered by employers that allows employees to save over many years via paycheck deductions for a variety of goals, such as retirement. Some employers may add to their employees' savings with matching contributions.

What Kinds of Tax Benefits Do ESPs Offer?

Normally, contributions to defined-contribution plans (such as a 401(k), one type of ESP), are tax deductible for employees. What's more, all the money in these accounts grows tax-deferred over what can be, ideally, many years.

Do I Pay Taxes on Money I Take Out of an ESP?

Unless your ESP is a Roth, yes, you'll pay taxes on withdrawals after you retire. That's because you get a tax break upfront with contributions that are deductible from your taxable income. If you participate in a Roth ESP, you don't get that upfront tax deduction but you won't owe any taxes when you make qualified withdrawals.

Employee Savings Plans are employer-sponsored retirement savings plans that offer tax-advantaged opportunities to invest for the future. They include various defined-contribution plans such as the 401(k), 403(b), and 457(b), where contributions made by employees are tax deductible and the money in the accounts grows tax-deferred for years, until withdrawn.

The Roth version of the 401(k), 457(b), and 403(b) involves after-tax contributions (which are not tax deductible) but qualified withdrawals are tax free.

Health Savings Plans, profit-sharing plans, and non-qualified deferred compensation plans are other examples of ESPs.

U.S. Department of Labor, Employee Benefits Security Administration. " FAQs About Retirement Plans and ERISA ." Pages 1-2.

U.S. Department of Labor, Employee Benefits Security Administration. " FAQs About Retirement Plans and ERISA ." Pages 4-5.

Social Security Administration. " The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers ."

Internal Revenue Service. " 401(k) Plan Overview ."

Internal Revenue Service. " Roth Account in Your Retirement Plan ."

Internal Revenue Service. " 401(k) Plans ."

Internal Revenue Service. " 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000 ."

Internal Revenue Service. " Retirement Plans FAQs on Designated Roth Accounts ." Select "Can My Employer Match My Designated Roth Contributions? Must My Employer Allocate the Matching Contributions to a Designated Roth Account?"

Internal Revenue Service. " Retirement Topics – Termination of Employment ."

Internal Revenue Service. " Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans ." Pages 3-5.

Fidelity. " Deferred Compensation Plans: Things To Know ."

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For the most common types of 401(k) plans, they can only be obtained through an employer.

Saving for retirement through a 401(k) plan is one of the easiest ways to prepare for retirement, particularly with its tax advantages and potential employer match, but a downside could be more limited investment options compared with an IRA.

Employees historically have had to opt into their workplace retirement plan, but as of Jan. 1, 2025, employers will be required to automatically enroll participants in 401(k) and 403(b) plans once employees are eligible.

What is a 401(k)?

A 401(k) plan is a tax-advantaged retirement account designed to help people prepare for retirement. The most common type of 401(k) plan is offered through an employer to employees, who can contribute part of their salary to be invested in 401(k) accounts. While not required, many employers match some employee contributions.

» Estimate how your 401(k) plan will grow with our 401(k) calculator .

Like other retirement plans, the IRS adjusts the 401(k) contribution limit periodically. In 2024, individuals can contribute $23,000 in 2024 ($30,500 for those age 50 or older).

Don't have access to a 401(k) plan or want to further maximize your retirement savings? Enter the IRA : These accounts offer some attractive benefits (a broader selection of investments and generally lower fees), albeit with a few downsides (lower contribution limits and restrictions for high earners). An IRA is different from a 401(k), but you can have both as part of your retirement strategy.

» Interested in an IRA? Check out the best IRA accounts available now.

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How does a 401(k) work?

A 401(k) plan works by investing employee contributions — and employer matches, if offered — over time. After enrolling in your 401(k) plan, you can select your investments based on what’s offered by your employer’s plan provider.

» More on how to invest your 401(k) plan.

Depending on the type of 401(k) plan you chose, you could get some pretty useful tax advantages either when you contribute the money, or when you make withdrawals in retirement.

» A step-by-step guide on how to set up your 401(k)

Traditional 401(k) vs. Roth 401(k)

There are two main types of 401(k) plans — the traditional and Roth — which are differentiated by their tax-advantages.

Traditional 401(k)

Contributions to a traditional 401(k) plan are taken out of your paycheck before the IRS takes its cut, and your money grows tax-free. Let’s say Uncle Sam normally takes 20 cents of every dollar you earn to cover taxes. Saving $800 a month outside of a 401(k) requires earning $1,000 a month — $800, plus $200 to cover the IRS’ cut.

Besides the boost to your savings power, pretax contributions to a traditional 401(k) have another nice side effect: They lower your total taxable income for the year. For example, let’s say you make $65,000 a year and put $19,500 into your 401(k). Instead of paying income taxes on the entire $65,000 you earned, you’ll only owe tax on $45,500 of your salary. In other words, saving for the future lets you shield $19,500 from taxation.

Once the money is in your 401(k), the force field that protects it from taxation remains in place. This is true for both traditional and Roth 401(k)s. As long as the money remains in the account, you pay no taxes on any investment growth: Not on interest, not on dividends and not on any investment gains [0] IRS . 401(k) Plan Overview . Accessed Sep 26, 2023. View all sources .

But the tax-repellent properties of the traditional 401(k) don’t last forever. Remember when you got that tax deduction on the money you contributed to the plan? Well, eventually the IRS comes back around to take a cut. In technical terms, your contributions and the investment growth are tax-deferred — put off until you start making withdrawals from the account in retirement. At that point, you’ll owe income taxes.

Traditional 401(k)s have one more caveat: after a certain age, account holders must take required minimum distributions, which aren’t required with a Roth 401(k).

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Roth 401(k)

If your employer offers a Roth 401(k) – and not all do – you can contribute after-tax income and your distributions will be tax-free in retirement.

The Roth 401(k) offers the same tax shield as a traditional 401(k) on your investments when they are in the account; you owe nothing to the IRS on the money as it grows. But unlike with qualified withdrawals from a regular 401(k), with a Roth, you owe the IRS nothing when you start taking distributions.

How’s that, exactly? Remember we mentioned earlier that, depending on the type of 401(k) plan, you get a tax break either when you contribute or when you withdraw money in retirement? Well, the IRS can charge you income taxes only once.

You’ve already paid your due because your contributions were made with post-tax dollars. And any income you get from the account – dividends, interest or capital gains – grows tax-free, and when you withdraw money in retirement, you and Uncle Sam are already settled up.

As of January 2024, plan participants can make a hardship withdrawal for emergency expenses of up to $1,000. [0] Senate.gov . SECURE 2.0 Act of 2022 . Accessed Sep 26, 2023. View all sources

» Choosing between the two? Here’s more on traditional vs Roth 401(k) plans.

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9 best retirement plans in February 2024

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It can be easy to let planning for retirement slip by, while you’re focusing on your career or raising children. In fact, 56 percent of working Americans say they’re behind on retirement savings, according to a 2023 Bankrate survey . So it’s important to know what options you have and their benefits, when it comes to creating a financially secure future.

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On This Page

The 9 best retirement plans

Other accounts for retirement saving, key plan benefits to consider, which retirement plan is best for you, how to get started, what is the best investment strategy for retirement.

  • Related content
  • Defined contribution plans
  • Solo 401(k) plan
  • Traditional pensions
  • Guaranteed income annuities (GIAs)
  • The Federal Thrift Savings Plan
  • Cash-balance plans
  • Cash-value life insurance plan
  • Nonqualified deferred compensation plans (NQDC)

1. Defined contribution plans

Since their introduction in the early 1980s, defined contribution (DC) plans , which include 401(k)s, have all but taken over the retirement marketplace. Roughly 86 percent of Fortune 500 companies offered only DC plans rather than traditional pensions in 2019, according to a study from insurance broker Willis Towers Watson.

The 401(k) plan is the most ubiquitous DC plan among employers of all sizes, while the similarly structured 403(b) plan is offered to employees of public schools and certain tax-exempt organizations, and the 457(b) plan is most commonly available to state and local governments.

The employee's contribution limit for each plan is $23,000 in 2024 ($30,500 for those aged 50 and over).

Many DC plans offer a Roth version, such as the Roth 401(k) in which you use after-tax dollars to contribute, but you can take the money out tax-free at retirement.

"The Roth election makes sense if you expect your tax rate to be higher at retirement than it is at the time you're making the contribution," says David Littell, professor emeritus of taxation at The American College of Financial Services.

401(k) plans

A 401(k) plan is a tax-advantaged plan that offers a way to save for retirement. With a traditional 401(k) an employee contributes to the plan with pre-tax wages, meaning contributions are not considered taxable income. The 401(k) plan allows these contributions to grow tax-free until they’re withdrawn at retirement. At retirement, distributions create a taxable gain, though withdrawals before age 59 ½ may be subject to taxes and additional penalties.

With a Roth 401(k) an employee contributes after-tax dollars and gains are not taxed as long as they are withdrawn after age 59 1/2.

A 401(k) plan can be an easy way to save for retirement, because you can schedule the money to come out of your paycheck and be invested automatically. The money can be invested in a number of high-return investments such as stocks, and you won’t have to pay tax on the gains until you withdraw the funds (or ever in a Roth 401(k)). In addition, many employers offer you a match on contributions, giving you free money – and an automatic gain – just for saving.

One key disadvantage of 401(k) plans is that you may have to pay a penalty for accessing the money if you need it for an emergency. While many plans do allow you to take loans from your funds for qualified reasons, it’s not a guarantee that your employer’s plan will do that. Your investments are limited to the funds provided in your employer’s 401(k) program, so you may not be able to invest in what you want to.

What it means to you

A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly.

403(b) plans

A 403(b) plan is much the same as a 401(k) plan, but it’s offered by public schools, charities and some churches, among others. The employee contributes pre-tax money to the plan, so contributions are not considered taxable income, and these funds can grow tax-free until retirement. At retirement, withdrawals are treated as ordinary income, and distributions before age 59 ½ may create additional taxes and penalties.

Similar to the Roth 401(k), a Roth 403(b) allows you to save after-tax funds and withdraw them tax-free in retirement.

A 403(b) is an effective and popular way to save for retirement, and you can schedule the money to be automatically deducted from your paycheck, helping you to save more effectively. The money can be invested in a number of investments, including annuities or high-return assets such as stock funds, and you won’t have to pay taxes until you withdraw the money. Some employers may also offer you a matching contribution if you save money in a 403(b).

Like the 401(k), the money in a 403(b) plan can be difficult to access unless you have a qualified emergency. While you may still be able to access the money without an emergency, it may cost you additional penalties and taxes, though you can also take a loan from your 403(b). Another downside: You may not be able to invest in what you want, since your options are limited to the plan’s investment choices.

What it means to you: A 403(b) plan is one of the best ways for workers in certain sectors to save for retirement, especially if they can receive any matching funds. This 403(b) calculator can help you determine how much you can save for retirement.

457(b) plans

A 457(b) plan is similar to a 401(k), but it’s available only for employees of state and local governments and some tax-exempt organizations. In this tax-advantaged plan, an employee can contribute to the plan with pre-tax wages, meaning the income is not taxed. The 457(b) allows contributions to grow tax-free until retirement, and when the employee withdraws money, it becomes taxable.

A 457(b) plan can be an effective way to save for retirement, because of its tax advantages. The plan offers some special catch-up savings provisions for older workers that other plans don’t offer, as well. The 457(b) is considered a supplemental savings plan, and so withdrawals before age 59 ½ are not subject to the 10 percent penalty that 403(b) plans are.

The typical 457(b) plan does not offer an employer match, which makes it much less attractive than a 401(k) plan. Also, it’s even tougher to take an emergency withdrawal from a 457(b) plan than from a 401(k).

A 457(b) plan can be a good retirement plan, but it does offer some drawbacks compared to other defined contributions plans. And by offering withdrawals before the typical retirement age of 59 ½ without an additional penalty, the 457(b) can be beneficial for retired public servants who may have a physical disability and need access to their money.

2. IRA plans

An IRA is a valuable retirement plan created by the U.S. government to help workers save for retirement. Individuals can contribute up to $7,000 to an account in 2024, and workers over age 50 can contribute up to $8,000.

There are many kinds of IRAs, including a traditional IRA, Roth IRA, spousal IRA, rollover IRA, SEP IRA and SIMPLE IRA. Here’s what each is and how they differ from one another.

Traditional IRA

A traditional IRA is a tax-advantaged plan that allows you significant tax breaks while you save for retirement. Anyone who earns money by working can contribute to the plan with pre-tax dollars, meaning any contributions are not taxable income. The IRA allows these contributions to grow tax-free until the account holder withdraws them at retirement and they become taxable. Earlier withdrawals may leave the employee subject to additional taxes and penalties.

A traditional IRA is a very popular account to invest for retirement, because it offers some valuable tax benefits, and it also allows you to purchase an almost-limitless number of investments – stocks, bonds, CDs, real estate and still other things. Perhaps the biggest benefit, though, is that you won’t owe any tax until you withdraw the money at retirement.

If you need your money from a traditional IRA, it can be costly to remove it because of taxes and additional penalties. And an IRA requires you to invest the money yourself, whether that’s in a bank or in stocks or bonds or something else entirely. You’ll have to decide where and how you’ll invest the money, even if that’s only to ask an adviser to invest it.

What it means to you: A traditional IRA is one of the best retirement plans around, though if you can get a 401(k) plan with a matching contribution, that’s somewhat better. But if your employer doesn’t offer a defined contribution plan, then a traditional IRA is available to you instead — though the tax-deductibility of contributions is eliminated at higher income levels.

A Roth IRA is a newer take on a traditional IRA, and it offers substantial tax benefits. Contributions to a Roth IRA are made with after-tax money, meaning you’ve paid taxes on money that goes into the account. In exchange, you won’t have to pay tax on any contributions and earnings that come out of the account at retirement.

The Roth IRA offers several advantages, including the special ability to avoid taxes on all money taken out of the account in retirement, at age 59 ½ or later. The Roth IRA also provides lots of flexibility, because you can often take out contributions – not earnings – at any time without taxes or penalties. This flexibility actually makes the Roth IRA a great retirement plan.

As with a traditional IRA, you’ll have full control over the investments made in a Roth IRA. And that means you’ll need to decide how to invest the money or have someone do that job for you. There are income limits for contributing to a Roth IRA, though there’s a back-door way to get money into one.

A Roth IRA is an excellent choice for its huge tax advantages, and it’s an excellent choice if you’re able to grow your earnings for retirement and keep the taxman from touching it again.

Spousal IRA

IRAs are normally reserved for workers who have earned income, but the spousal IRA allows the spouse of a worker with earned income to fund an IRA as well. However, the working spouse’s taxable income must be more than the contributions made to any IRAs, and the spousal IRA can either be a traditional IRA or a Roth IRA.

The biggest positive of the spousal IRA is that it allows a non-working spouse to take advantage of an IRA’s various benefits, either the traditional or Roth version.

There’s not a particular downside to a spousal IRA, though like all IRAs, you’ll have to decide how to invest the money.

The spousal IRA allows you to take care of your spouse’s retirement planning without forcing your partner to have earned income, as would usually be the case. That may allow your spouse to stay home or take care of other family needs.

Rollover IRA

A rollover IRA is created when you move a retirement account such as a 401(k) or IRA to a new IRA account. You “roll” the money from one account to the rollover IRA, and can still take advantage of the tax benefits of an IRA. You can establish a rollover IRA at any institution that allows you to do so, and the rollover IRA can be either a traditional IRA or a Roth IRA. There’s no limit to the amount of money that can be transferred into a rollover IRA.

A rollover IRA also allows you to convert the type of retirement account, from a traditional 401(k) to a Roth IRA. These types of transfers can create tax liabilities , however, so it’s important to understand the consequences before you decide how to proceed.

A rollover IRA allows you to continue to take advantage of attractive tax benefits, if you decide to leave a former employer’s 401(k) plan for whatever reason. If you simply want to change IRA providers for an existing IRA, you can transfer your account to a new provider. As in all IRAs, you can buy a wide variety of investments.

Like all IRAs, you’ll need to decide how to invest the money, and that may cause problems for some people. You should pay special attention to any tax consequences for rolling over your money, because they can be substantial. But this is generally only an issue if you’re converting your account type from a traditional to a Roth version.

A rollover IRA is a convenient way to move from a 401(k) to an IRA.

The SEP IRA is set up like a traditional IRA, but for small business owners and their employees. Only the employer can contribute to this plan, and contributions go into a SEP IRA for each employee rather than a trust fund. Self-employed individuals can also set up a SEP IRA.

Contribution limits in 2024 are 25 percent of compensation or $69,000, whichever is less. Figuring out contribution limits for self-employed individuals is a bit more complicated .

"It's very similar to a profit-sharing plan," says Littell, because contributions can be made at the discretion of the employer.

For employees, this is a freebie retirement account. For self-employed individuals, the higher contribution limits make them much more attractive than a regular IRA.

There's no certainty about how much employees will accumulate in this plan. Also, the money is more easily accessible. This can be viewed as more good than bad, but Littell views it as bad.

Account holders are still tasked with making investment decisions. Resist the temptation to break open the account early. If you tap the money before age 59 ½, you'll likely have to pay a 10 percent penalty on top of income tax.

With 401(k) plans, employers have to pass several nondiscrimination tests each year to make sure that highly compensated workers aren't contributing too much to the plan relative to the rank-and-file.

The SIMPLE IRA bypasses those requirements because the same benefits are provided to all employees. The employer has a choice of whether to contribute a 3 percent match or make a 2 percent non-elective contribution even if the employee saves nothing in his or her own SIMPLE IRA.

Littell says most SIMPLE IRAs are designed to provide a match, so they provide an opportunity for workers to make pre-tax salary deferrals and receive a matching contribution. To the employee, this plan doesn't look much different from a 401(k) plan.

The employee contribution has a limit of $16,000 for 2024, compared to $23,000 for other defined contribution plans. But most people don't contribute that much anyway, says Littell.

As with other DC plans, employees have the same decisions to make: how much to contribute and how to invest the money. Some entrepreneurs prefer the SIMPLE IRA to the SEP IRA – here are the key differences .

3. Solo 401(k) plan

Alternatively known as a Solo-k, Uni-k and One-participant k, the solo 401(k) plan is designed for a business owner and his or her spouse.

Because the business owner is both the employer and employee, elective deferrals of up to $23,000 can be made in 2024, plus a non-elective contribution of up to 25 percent of compensation up to a total annual contribution of $69,000 for businesses, not including catch-up contributions of $7,500 for 2024.

"If you don't have other employees, a solo is better than a SIMPLE IRA because you can contribute more to it," says Littell. "The SEP is a little easier to set up and to terminate." However, if you want to set up your plan as a Roth, you can't do it in a SEP, but you can with a Solo-k.

It's a bit more complicated to set up, and once assets exceed $250,000, you'll have to file an annual report on Form 5500-SE.

If you have plans to expand and hire employees, this plan won't work . Once you hire other workers, the IRS mandates that they must be included in the plan if they meet eligibility requirements, and the plan will be subject to non-discrimination testing. The solo 401(k) compares favorably to the popular SEP IRA, too .

4. Traditional pensions

Traditional pensions are a type of defined benefit (DB) plan, and they are one of the easiest to manage because so little is required of you as an employee.

Pensions are fully funded by employers and provide a fixed monthly benefit to workers at retirement. But DB plans are on the endangered species list because fewer companies are offering them. Just 14 percent of Fortune 500 companies enticed new workers with pension plans in 2019, down from 59 percent in 1998, according to data from Willis Towers Watson.

Why? DB plans require the employer to make good on an expensive promise to fund a hefty sum for your retirement. Pensions, which are payable for life, usually replace a percentage of your pay based on your tenure and salary.

A common formula is 1.5 percent of final average compensation multiplied by years of service, according to Littell. A worker with an average pay of $50,000 over a 25-year career, for example, would receive an annual pension payout of $18,750, or $1,562.50 a month.

This benefit addresses longevity risk – or the risk of running out of money before you die.

"If you understand that your company is providing a replacement of 30 percent to 40 percent of your pay for the rest of your life, plus you're getting 40 percent from Social Security, this provides a strong baseline of financial security," says Littell. "Additional savings can help but are not as central to your retirement security."

Since the formula is generally tied to years of service and compensation, the benefit grows more rapidly at the end of your career. "If you were to change jobs or if the company were to terminate the plan before you hit retirement age, you can get a lot less than the benefit you originally expected," says Littell.

Since company pensions are increasingly rare and valuable, if you are fortunate enough to have one, leaving the company can be a major decision. Should you stay or should you go? It depends on the financial strength of your employer, how long you’ve been with the company and how close you are to retiring. You can also factor in your job satisfaction and whether there are better employment opportunities elsewhere.

5. Guaranteed income annuities (GIAs)

Guaranteed income annuities are generally not offered by employers, but individuals can buy these annuities to create their own pensions. You can trade a big lump sum at retirement and buy an immediate annuity to get a monthly payment for life, but most people aren't comfortable with this arrangement. More popular are deferred income annuities that are paid into over time.

For example, at age 50, you can begin making premium payments until age 65, if that's when you plan to retire. "Each time you make a payment, it bumps up your payment for life," says Littell.

You can buy these on an after-tax basis, in which case you'll owe tax only on the plan's earnings. Or you can buy it within an IRA and can get an upfront tax deduction, but the entire annuity would be taxable when you take withdrawals.

Littell himself invested in a deferred income annuity to create an income stream for life. "It's very satisfying, it felt really good building a bigger pension over time," he says.

If you're not sure when you're going to retire or even if you're going to retire, then it may not make sense. "You're also locking into a strategy that you can't get rid of," he says.

In addition, annuities are complex legal contracts, and it can be difficult to understand your rights and rewards for signing up for an annuity. You’ll want to be fully informed about what the annuity will and won’t do for you.

You'll be getting bond-like returns and you lose the possibility of getting higher returns in the stock market in exchange for the guaranteed income. Since payments are for life, you also get more payments (and a better overall return) if you live longer.

"People forget that these decisions always involve a trade-off," Littell says.

6. The Federal Thrift Savings Plan

The Thrift Savings Plan (TSP) is a lot like a 401(k) plan on steroids, and it’s available to government workers and members of the uniformed services.

Participants choose from five low-cost investment options, including a bond fund, an S&P 500 index fund, a small-cap fund and an international stock fund — plus a fund that invests in specially issued Treasury securities.

On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.

Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.

“The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent,” says Littell. “Another positive is that the investment fees are shockingly low – four-hundredths of a percentage point.” That translates to 40 cents annually per $1,000 invested – much lower than you’ll find elsewhere.

As with all defined contribution plans, there’s always uncertainty about what your account balance might be when you retire.

You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.

7. Cash-balance plans

Cash-balance plans are a type of defined benefit, or pension plan, too.

But instead of replacing a certain percentage of your income for life, you are promised a certain hypothetical account balance based on contribution credits and investment credits (e.g., annual interest). One common setup for cash-balance plans is a company contribution credit of 6 percent of pay plus a 5 percent annual investment credit, says Littell.

The investment credits are a promise and are not based on actual contribution credits. For example, let's say a 5 percent return, or investment credit, is promised. If the plan assets earn more, the employer can decrease contributions. In fact, many companies that want to shed their traditional pension plan convert to a cash-balance plan because it allows them better control over the costs of the plan.

It still provides a promised benefit, and you don't have to contribute anything to it. "There's a fair amount of certainty in how much you're going to get," says Littell. Also, if you do decide to switch jobs, your account balance is portable so you'll get whatever the account is worth on your way out the door of your old job.

If the company changes from a generous pension plan to a cash-balance plan, older workers can potentially lose out, though some companies will grandfather long-term employees into the original plan. Also, the investment credits are relatively modest, typically 4 percent or 5 percent. "It becomes a conservative part of your portfolio," says Littell.

The date you retire will impact your benefit, and working longer is more advantageous. "Retiring early can truncate your benefit," says Littell.

Also, you'll get to choose from a lump sum or an annuity form of benefit. When given the option between a $200,000 lump sum or a monthly annuity check of $1,000 for life, “too many people,” choose the lump sum when they'd be better off getting the annuity for life, says Littell.

8. Cash-value life insurance plan

Some companies offer cash-value life insurance plans as a benefit.

There are various types: whole life, variable life, universal life and variable universal life. They provide a death benefit while at the same time building cash value, which could support your retirement needs. If you withdraw the cash value, the premiums you paid – your cost basis – come out first and are not subject to tax.

"There are some similarities to the Roth tax treatment, but more complicated,” says Littell. “You don't get a deduction on the way in, but if properly designed, you can get tax-free withdrawals on the way out."

It addresses multiple risks by providing either a death benefit or a source of income. Plus, you get tax deferral on the growth of your investment.

"If you don't do it right, if the policy lapses, you end up with a big tax bill," says Littell. Like other insurance solutions, once you buy it, you are more or less locked into the strategy for the long term. Another risk is that the products don't always perform as well as the illustrations might show that they will.

These products are for wealthier people who have already maxed out all other retirement savings vehicles. If you've reached the contribution limits for your 401(k) and your IRA, then you might consider investing in this type of life insurance.

9. Nonqualified deferred compensation plans (NQDC)

Unless you're a top executive in the C-suite, you can pretty much forget about being offered an NQDC plan . There are two main types: One looks like a 401(k) plan with salary deferrals and a company match, and the other is solely funded by the employer.

The catch is that most often the latter one is not really funded. The employer puts in writing a "mere promise to pay" and may make bookkeeping entries and set aside funds, but those funds are subject to claims by creditors.

The benefit is you can save money on a tax-deferred basis, but the employer can't take a tax deduction for its contribution until you start paying income tax on withdrawals.

They don't offer as much security, because the future promise to pay relies on the solvency of the company.

"There's some risk that you won't get your payments (from an NQDC plan) if the company has financial problems," says Littell.

For executives with access to an NQDC plan in addition to a 401(k) plan, Littell's advice is to max out the 401(k) contributions first. Then if the company is financially secure, contribute to the NQDC plan if it's set up like a 401(k) with a match.

The plans above were established for the express purpose of funding retirement, but other special tax-advantaged accounts – namely, health savings accounts (HSAs) and 529 education savings plans – can also be used to fund retirement. 

HSAs were created as a way to save for healthcare expenses, but they can effectively be used as a supplemental retirement account . HSAs offer a triple tax advantage: You can contribute on a pre-tax basis, your money can grow tax-free and withdrawals are tax-free if used for qualified healthcare expenses. But when you hit age 65, any money in the account can be withdrawn and used for any purpose without a penalty, though you’ll owe taxes on the withdrawal at ordinary income rates. This feature makes the HSA function like a traditional IRA, if held to age 65.

While the 529 plan was established as a way to save for education expenses, it can now be used as a source of money to fund a Roth IRA, subject to a few important restrictions . The legal change eliminates one of the major disadvantages of the 529 plan – the potential to leave stranded money in the account – and allows it to be used for the key need of retirement saving.

While these plans are not intended to be used as primary retirement accounts, you can still use them to supplement your retirement savings if you’ve exhausted other better avenues.

Virtually all retirement plans offer a tax advantage, whether it's available upfront during the savings phase or when you're taking withdrawals. For example, traditional 401(k) contributions are made with pre-tax dollars, reducing your taxable income. Roth 401(k) plans, in contrast, are funded with after-tax dollars but withdrawals are tax-free. ( Here are other key differences between the two. )

Some retirement savings plans also include matching contributions from your employer, such as 401(k) or 403(b) plans, while others don’t. When trying to decide whether to invest in a 401(k) at work or an individual retirement account (IRA), go with the 401(k) if you get a company match – or do both if you can afford it.

If you were automatically enrolled in your company's 401(k) plan, check to make sure you’re taking full advantage of the company match if one is available.

And consider increasing your annual contribution, since many plans start you off at a paltry deferral level that is not enough to ensure retirement security. About 40 percent of 401(k) plans that offer automatic enrollment, according to Vanguard, use a default savings deferral rate of just 3 percent or less. Yet T. Rowe Price says you should “aim to save at least 15 percent of your income each year.”

If you're self-employed, you also have several retirement savings options to choose from. In addition to the plans described below for rank-and-file workers as well as entrepreneurs, you can also invest in a Roth IRA or traditional IRA , subject to certain income limits, which have smaller annual contribution limits than most other plans. You also have a few extra options not available to everyone, including the SEP IRA, the SIMPLE IRA and the solo 401(k) .

In many cases, you simply won’t have a choice of retirement plans. You’ll have to take what your employer offers, whether that’s a 401(k), a 403(b), a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.

Here’s a comparison of the pros and cons of a few retirement plans.

Employer-offered retirement plans

Defined-contribution plans such as the 401(k) and 403(b) offer several benefits over a defined-benefit plan such as a pension plan:

  • Portability: You can take your 401(k) or 403(b) to another employer when you change jobs or even roll it into an IRA at that point. A pension plan may stick with your employer, so if you leave the company, you may not have a plan.
  • Potential for higher returns: A 401(k) or 403(b) may offer the potential for much higher returns because it can be invested in higher-return assets such as stocks.
  • Freedom: Because of its portability, a defined-contribution plan gives you the ability to leave an employer without fear of losing retirement benefits.
  • Not reliant on your employer’s success: Receiving an adequate pension may depend a lot on the continued existence of your employer. In contrast, a defined-contribution plan does not have this risk because of its portability.

While those advantages are important, defined-benefit plans offer some pros, too:

  • Income that shouldn’t run out: One of the biggest benefits of a pension plan is that it typically pays until your death, meaning you will not outlive your income, a real risk with 401(k), 403(b) and other such plans.
  • You don’t need to manage them: Pensions don’t require much of you. You don’t have to worry about investing your money or what kind of return it’s making or whether you’re properly invested. Your employer takes care of all of that.

So those are important considerations between defined-contribution plans and defined-benefit plans. More often than not, you won’t have a choice between the two at any individual employer.

Retirement plans for self-employed or small business owners

If you’re self-employed or own a small business, you have some further options for creating your own retirement plan. Three of the most popular options are a solo 401(k), a SIMPLE IRA and a SEP IRA, and these offer a number of benefits to participants:

  • Higher contribution limits: Plans such as the solo 401(k) and SEP IRA give participants much higher contribution limits than a typical 401(k) plan.
  • The ability to profit share: These plans may allow you to contribute to the employee limit and then add in an extra helping of profits as an employer contribution.
  • Less regulation: These retirement plans typically reduce the amount of regulation required versus a standard plan, meaning it’s easier to administer them.
  • Investible in higher-return assets: These plans can be invested in higher-return assets such as stocks or stock funds.
  • Varied investment options: Unlike a typical company-administered retirement plan, these plans may allow you to invest in a wider array of assets.

So those are some of the key benefits of retirement plans for the self-employed or small business owners.

With some of these retirement plans (such as defined benefit and defined contribution plans), you’ll have access to the plan through your employer. So if your employer doesn’t offer them, you really don’t have that option at all. But if you’re self-employed (or even just running a side gig) or earn any income, then you have options to set up a retirement plan for yourself.

First, you’ll need to determine what kind of account you’ll need. If you’re not running a business, then your option is an IRA, but you’ll need to decide between a traditional and a Roth IRA .

If you do have a business – even a one-person shop – then you have a few more options, and you’ll need to come up with the best alternative for your situation.

Then you can contact a financial institution to determine if they offer the kind of plan you’re looking for. In the case of IRAs, almost all large financial institutions offer some form of IRA, and you can quickly set up an account at one of the major online brokerages .

In the case of self-employed plans, you may have to look a little more, since not all brokers have every type of plan, but high-quality brokers offer them and often charge no fee to establish one.

Many workers have both a 401(k) plan and an IRA at their disposal, so that gives them two tax-advantaged ways to save for retirement, and they should make the most of them. But it can make sense to use your account options strategically to really max out your benefits.

One of your biggest advantages is actually an employer who matches your retirement contributions up to some amount. The most important goal of saving in a 401(k) is to try and max out this employer match. It’s easy money that provides you an immediate return for saving.

For example, this employer “match” will often give you 50 to 100 percent of your contribution each year, up to some maximum, perhaps 3 to 5 percent of your salary.

To optimize your retirement accounts, experts recommend investing in both a 401(k) and an IRA in the following order:

  • Max out your 401(k) match: The 401(k) is your top choice if your employer offers any kind of match. Once you receive this maximum free money, consider investing in an IRA.
  • Max out your IRA: Turn to the IRA if you’ve maxed out your 401(k) match or if your employer doesn’t offer a 401(k) plan or a match. Experts favor the Roth IRA because of all its perks.
  • Then max out your 401(k): If you’ve maxed out your IRA and you can save more, you can turn back to your 401(k) and add more up until the maximum annual contribution.

In any case, the best strategy to secure your financial future is to top out your accounts, saving the maximum legal amounts each year. The earlier you start investing for your future, the more your money will be able to compound, and these tax advantages can help you amass money even more quickly because you won’t have the extra drag from taxes.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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Individual 401(k) Plan—Pre-Tax and Roth

If you're self-employed or run an owner-only business, you can make substantial contributions toward your retirement with an Individual 401(k) plan. It's easy to administer and has many of the same benefits as a conventional 401(k). Best of all, you direct how your contributions are invested. 

What are the Benefits of an Individual 401(k) Plan

Every Schwab account comes with one-on-one investment help and guidance. With this account, you'll also get:

  • Higher potential contribution limits than SEP IRA and profit-sharing plans.
  • Ability to make profit-sharing contributions and salary deferrals—pre-tax and Roth.
  • Tax-deductible contributions and tax-deferred earnings on pre-tax contributions.
  • Tax-free distributions if qualified on designated Roth contributions. 
  • Flexible annual contributions.
  • Retirement planning tools and resources. 
  • 24/7 service and support.

You can also view additional Individual 401(k) information here.

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Have questions about our Individual 401(k) plan? Here are responses to some of the most common questions we hear. If you have a specific question that’s not answered here, please call us at  866-855-6637 .

Get detailed instructions in Establish Your Plan below, or call us at  866-855-6637   if you have questions.

An Individual 401(k) plan is available to self-employed individuals and business owners, including sole proprietors, corporations, partnerships, and tax-exempt organizations with no employees other than a spouse. You must have a minimum 5% business share to be eligible.

  • Contributions to a pre-tax Individual 401(k) plan are generally tax-deductible. 
  • For a pre-tax Individual 401(k) earnings grow tax-deferred and assets are not taxed until they are withdrawn in retirement. 
  • Designated Roth contributions are not deductible but are not taxed if over 59 1/2 and have been held for 5 years.

Plan accounts are funded with a combination of pre-tax and designated Roth salary deferrals and annual profit-sharing contributions. Vesting is immediate, and participants can direct how contributions are invested. Individual 401(k) plans do not need to be funded annually.

SECURE 1.0 and 2.0 allows unincorporated business owners to establish an Individual 401(k) by tax filing deadline plus extension. Salary Deferrals are due by tax filing deadline no extensions for new plans, while existing plans and profit sharing plan contributions can be made up to tax filing deadline plus extension. If your business in incorporated, you must make your deferral contributions in the same tax year.

You'll need to file IRS Form 5500 annually when your plan assets reach or exceed $250,000.

You must have a triggering event—generally either termination of employment or retirement—to take a distribution.

Pre-tax Individual 401(k)

  • Generally all withdrawals are subject to taxes.
  • Withdrawals before age 59½ may be subject to a 10% penalty. 
  • Distributions are subject to a mandatory 20% federal tax withholding, except for Required Minimum Distributions (RMDs), hardship withdrawals, certain qualified exceptions and direct rollovers. 
  • If you own 5% or more of the business, you must begin taking RMDs annually, starting with the year you reach age 73. If you don't make withdrawals, you may be subject to pay a penalty.

Under SECURE 2.0, if you don't take your RMD by the IRS deadline, a 25% excise tax on insufficient or late RMD withdrawals applies. If the RMD is corrected timely, the penalty can be reduced to 10%. Follow the IRS guidelines and consult your tax advisor.

Roth Individual 401(k)   Qualified Distributions: Are always tax-free

  • You can start making qualified distributions from a Roth 401(k) once you have satisfied two conditions: You are age 59½ or older and you have met the five-year rule.

Non-Qualified Distributions: Earnings are generally subject to taxes

  • You are under 59½ and/or have not met the 5-year rule you may have to pay income tax and if under 59½ may incur a 10% penalty
  • Early withdrawals must include both contributions and earnings, prorated based on the ratio of contributions to earnings in the account. 
  • Earnings are subject to a mandatory 20% federal tax withholding. Except hardship withdrawals, certain qualified exceptions and direct rollovers.

SECURE 2.0 has eliminated RMDs for Roth 401(k)s starting in 2024.

You may not take loans from your Individual 401(k) account.

Please refer to the IRS page on Individual 401(k)s link for more information. 

Establish Your Plan

Follow these instructions for establishing and contributing to a Schwab Individual 401(k) plan. Note: To establish your plan, you will need an Employer Identification Number (EIN) or a Social Security Number (SSN) if a sole-proprietor is acceptable.

  • Print and complete the adoption agreement . Complete both sections, the Adoption Agreement & the Trustee and Custodial Agreement. Retain a copy and return the signed original to Schwab.
  • Review the basic plan document , which describes and governs your account, and keep it for your records.
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  • You will need to open a separate account for each, one for the Individual 401(k) and one for the Roth Individual 401(k).
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  • If you are transferring or rolling over a Roth 401(k) from another provider, please complete the Roth Individual 401(k) Rollover/Transfer Data Form .
  • Distribute the pricing guide to all participants.
  • Optional: Review the benefits, features, and contribution eligibility of the plan.

After you've done your initial paperwork, here are the next steps.

The  Plan Summary  describes the plan benefits and eligibility requirements. Fill in the information and provide a photocopy of the completed document to each participant.  Do not return this document to Schwab . All participants, including the business owner, must complete the  Elective Deferral Agreement  to indicate the elective deferral amount to have withheld from compensation. Retain the original completed copy for your records and provide a photocopy to plan participants.  Do not return this document to Schwab .

Send one check made payable to Charles Schwab & Co., Inc., FBO "Your Company Name" along with a letter listing the exact amount to be deposited per account number and the plan year for which you are contributing. Be sure your check total matches the total amount of participant contributions. Mail your check to one of the addresses below:

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Use the  Contribution Transmittal Form  to record contributions to your participant accounts, including the business owner's.

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What Is an Employee Savings Plan (ESP)?

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Types of employee savings plans, pros and cons of an employee savings plan.

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An employee savings plan (ESP) is a type of employer-sponsored plan used to fund retirement and other savings goals. With an ESP, your employer deducts contributions from each of your paychecks and puts that money into a designated account. In some cases, your employer may even match your contributions.

Key Takeaways

  • An employee savings plan (ESP) is an employer-sponsored plan that allows you to set aside part of your paycheck for retirement, medical expenses, and other goals.
  • The most common types of ESPs are 401(k)s and 403(b)s, but they also include 457(b)s, TSPs, HSAs, FSAs, and others.
  • Most ESPs are funded with pre-tax dollars but may be funded with after-tax dollars if you opt for a Roth account.
  • Many employers offer matching programs where they’ll give you free money for contributing to your ESP. But you may have to stay at that company for a set period before you can keep your employer match.

Definition and Examples of an Employee Savings Plan

An ESP is an employer-sponsored plan that allows you to set aside a portion of your income for things such as retirement, medical expenses, a down payment on your first house, or other goals. Although primarily funded with pre-tax dollars, ESPs can be funded with after-tax dollars if using a Roth account.

  • Acronym : ESP
  • Alternate name : Employer-sponsored savings plan, salary-deferral plan

Some common examples of ESPs include:

  • Thrift Savings Plans (TSPs)
  • Health savings accounts (HSAs)
  • Flexible spending accounts (FSAs)
  • Profit-sharing plans
  • Defined benefit plans

Employers offer ESPs as part of their benefits package to incentivize employees to save for long-term goals such as retirement and health care expenses.

Your employer typically deducts your ESP contributions from your paycheck each period; you don’t have to set aside this money yourself. That amount gets deducted from your gross income at the end of the year when you file your taxes. The only exception is if you have an after-tax, or Roth, ESP. In this case, you won’t get a tax break until you start taking withdrawals.

All the money you contribute to your ESP is immediately yours. If you leave the company, you can take it with you or roll it into another account. However, any matches your employer makes may be subject to certain vesting schedules .

For example, let’s say your employer offers a 401(k) where they’ll match up to 5% of your salary. You make $100,000 a year. You really want to retire early, so your goal is to save the maximum amount, which is $19,500 for 2021. (This limit increases to $20,500 for 2022.)

You elect to have 19.5% of each paycheck directed to your 401(k). Your employer matches your contributions dollar for dollar, up to 5% of your salary. At the end of the year, you have $24,500 in your 401(k); you contributed $19,500, and your employer contributed the other $5,000.

Now let’s say your company has a vesting schedule that says you get 50% of your employer match after one year of service and 100% after two years. If you leave your company after one year, you walk away with $22,000 (your full $19,500 plus 50% of what your employer contributed). If you stick it out for two years, you keep the entire $24,500 plus any additional contributions you make that second year.

Most ESPs are used for retirement, but a few are intended specifically for medical expenses.

401(k)s are the most common type of ESP, giving employees a way to build up a sizable nest egg for retirement. Many employers even offer 401(k) matches , where they’ll match your contributions up to a certain percentage. Employees who have access to a 401(k) can save up to $19,500 for 2021 and $20,500 for 2022. Those ages 50 and older can save an additional $6,500 per year.

A 403(b) is a type of ESP only available to employees of tax-exempt organizations, such as nonprofits, churches, hospitals, public schools, and universities. Similar to a 401(k), it’s used for retirement savings and allows for an employer matching program.

A 457(b) is similar to a 401(k) or 403(b), but it’s only available to state and local government employees. This type of account allows employees to save for retirement and has one unique benefit not found with other ESPs: Generally, if you leave your job before age 59½ and need to withdraw your funds, you won’t pay a 10% penalty.

Thrift Savings Plan (TSP)

A Thrift Savings Plan (TSP) is similar to a 401(k), but it’s only available to federal employees through the U.S. government. This type of ESP allows eligible employees to set aside a portion of their income for retirement using either a traditional (pre-tax) or Roth (after-tax) account.

Health Savings Account (HSA)

Health savings accounts (HSAs) are a type of ESP that allows you to set aside part of your paycheck for qualified medical expenses. You fund them with pre-tax dollars, and you enjoy tax-free withdrawals when you use the money to cover health care costs.

You may be eligible for an HSA if you have a high-deductible health care plan (HDHP) and no other insurance coverage. Some employers even match contributions the same way they do with 401(k)s.

Flexible Spending Account (FSA)

Flexible spending accounts (FSAs) are similar to HSAs in that they’re both a type of ESP used for medical expenses. The difference, however, is that you don’t have to have a high-deductible health care plan to qualify for an FSA. On the downside, FSA funds don’t roll over year to year (you either use them or lose them).

Under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, employers are allowed to let employees roll over unused funds from the 2020 and 2021 plan years into 2022.

Profit-Sharing Plan

Many employers offer a 401(k) in conjunction with a profit-sharing plan . The difference is, employees don’t contribute to a profit-sharing plan. Instead, you earn shares of profit in the form of cash or stock based on company performance.

Defined Benefits Plan

Defined benefit plans, also known as pension plans , are far less common today than they used to be. With a defined benefit plan, you’re paid a set income in retirement. These kinds of plans are usually employer-funded rather than employee-funded.

Get an immediate tax break

Higher contribution limits

Easy way to save for retirement and medical expenses

Some employers match contributions

May pay taxes on withdrawals

Early withdrawal penalties may apply

Must be vested to keep employer contributions

Pros Explained

  • Get an immediate tax break : Unless you opt for a Roth account, which uses after-tax dollars, you’ll fund your ESP with tax-deferred contributions. This deferral lowers your taxable income for the year.
  • Higher contribution limits : Unlike individual retirement accounts (IRAs), which have contribution limits of $6,000 per year for 2021 and 2022, 401(k)s, 403(b)s, 457(b)s, and TSPs let you save up to $19,500 in 2021 and $20,500 in 2022. Those ages 50 and older can save an additional $6,500 per year in catch-up contributions.
  • Easy way to save for retirement and medical expenses : ESP contributions get automatically deducted from your paycheck, which means you can save each month without lifting a finger.
  • Some employers match contributions : Some employers will match your ESP contributions up to a certain dollar amount or percent. This is 100% free money and doesn’t count toward your contribution limits for the year.

Cons Explained

  • May pay taxes on withdrawals : Unless you have a Roth ESP, you’ll pay taxes on your money when you start taking withdrawals. You may also have to take required minimum distributions (RMDs) at age 72.
  • Early withdrawal penalties may apply : Because of the tax benefits, many ESPs penalize you if you withdraw money early (such as with retirement accounts) or don’t use the funds for their intended purposes (such as with HSAs and FSAs).
  • Must be vested to keep employer contributions : If your employer offers a matching program for your ESP, you may be required to stick with that company for a set number of years before you’re “ vested ” and truly own the money they contribute to your account.

Internal Revenue Service. " Retirement Topics - Vesting ." Accessed Dec. 26, 2021.

Internal Revenue Service. " IRS Announces 401(k) Limit Increases to $20,500 ." Accessed Dec. 26, 2021.

Internal Revenue Service. " Retirement Topics - Exceptions to Tax on Early Distributions ." Accessed Dec. 26, 2021.

Internal Revenue Service. " New Law Provides Additional Flexibility for Health FSAs and Dependent Care Assistance Programs ." Accessed Dec. 26, 2021.

Internal Revenue Service. " Retirement Topics - Required Minimum Distributions (RMDs) ." Accessed Dec. 26, 2021.

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Whatever stage in life you are in, it is important to consider what retirement will look like for you, even if it seems years away. The Citi Retirement Savings Plan (Plan) enables you to plan for retirement and supports you in achieving your savings goals.

Eligibility

In general, you are eligible* to begin contributing on your first day at Citi. If you do not make an election, Citi will automatically enroll you in the Plan at a 6% savings rate on a before-tax basis. Each year, your rate will increase by 1%.

You can change or stop your contributions at any time on My Total Compensation and Benefits .

Citi Matching Contributions

Citi matches your contributions to help you reach your retirement goals. In general, you are eligible for matching contributions after you have worked at Citi for one year. If you meet certain requirements, Citi provides an additional fixed contribution .

You are always 100% vested in your own contributions and the match; you are vested in Citi’s fixed contributions after three years of employment.

Another Way to Save

The Health Savings Account (HSA) provides another way to save for retirement. If you are enrolled in the High Deductible Plan with HSA , be sure to open your HSA so you can save on the cost of medical care. And don’t forget, you will get the added boost of Citi’s contributions to your account to help build your savings, too. Be sure to consider whether saving the funds for future health care expenses or using your balance today to offset your deductible or other eligible expenses makes the most sense for you and your family.

* Part-time employees working fewer than 20 hours per week should refer to Eligibility and Enrollment in the Retirement Savings Plan section of the Benefits Handbook for more information.

Please note: This website includes a brief summary of the basic terms of the Citi Retirement Savings Plans. If there is any conflict between this website content and the Plan document, or any written or oral communication by an individual representing the Plan, the terms of the Plan document (as interpreted by the Plan Administrator in its sole discretion) will be followed in determining your rights and benefits under the Plan.

Maximize your contributions to the Plan so that you may build your savings today for a more secure tomorrow. You can begin contributing on a before-tax 401(k) and/or a Roth after-tax basis on your first day at Citi.

How Much Can I Contribute?

You can contribute up to 50% of your eligible pay, with an annual Internal Revenue Service (IRS) maximum of $23,000 for 2024. If you will be at least 50 years old in 2024, you can contribute up to $30,500 ($23,000 in regular contributions plus $7,500 in catch-up contributions).

You can also roll over an account balance from your previous employer or an IRA at any time.

Account Options

Know the difference between contributing on a before-tax or Roth after-tax basis. When you contribute before-tax dollars you pay taxes when you withdraw the money. When you contribute Roth after-tax dollars you pay taxes on your contributions today, and take your withdrawals tax-free later.

The Plan provides flexibility to contribute to both accounts if you wish to do so. You can change your contribution rate (the percentage of eligible pay you contribute to the Plan), stop your contributions, or start them again at any time.

* For Roth distributions to be tax-free, you must be at least age 59½, permanently disabled, or deceased and the distributions must occur no earlier than during the fifth taxable year after the taxable year in which you made your first contribution.

** Employees age 50 and older can make catch-up contributions (up to a maximum of $7,500 in 2024).

Understand the Value of Citi Contributions

You can determine the impact the Citi Contributions will have on your savings over time.

Choose Your Investment Direction

The Plan offers investment options for every type of investor, whether you are confident in your own abilities to manage your money or you want to leave it to the professionals. Through the Plan’s investment options, you have a choice of:

  • Target date funds (pre-diversified index funds that shift in investment mix, according to your age)
  • Index funds
  • Actively managed funds
  • The Citigroup Common Stock Fund

You can choose to invest your account balance in any of the investment funds offered, and you can change your allocation at any time. However, if you elect to transfer funds between investment options you may not make another change for the next seven calendar days (except for certain transfers to money market funds).

If you are automatically enrolled in the Plan and have not made an investment election, your contributions will be invested in the Target date funds, which are the Plan’s default investment alternative.

Need help with your investment decisions? You can speak with an AFA Investment Advisor for personalized advice by calling 1 (800) 881-3938 . From the “benefits” menu, select the “401(k) Plans” option, then “Contact an Advisor Regarding Investment Advice and Financial Guidance.” AFA Investment Advisors are available 9 a.m. to 9 p.m. ET, Monday through Friday.

Citi helps you save for retirement. In addition to your own contributions, Citi matches contributions to your account, allowing you to build your savings faster.

You are eligible for Matching Contributions on the first of the month after you have worked at Citi for one year:

  • Citi contributes $1 for each $1 that you contribute to the Plan, up to a maximum of 6% of your annual eligible pay. This means that if you contribute 6% or more, for every $6 you contribute, you will have a total of $12 to invest (up to IRS maximum limits) to help make the most of your savings potential.
  • Citi’s contributions are posted annually to your account. You are always 100% vested in Citi’s Matching Contributions and you will keep these funds if you leave Citi for any reason.

Citi Fixed Contributions

If you are a full-time or part-time employee who is immediately eligible to participate in the Plan, you may be eligible for a Fixed Contribution starting the first of the month following the month in which you attain one year of continuous employment as an eligible employee. For additional eligibility rules, visit the Benefits Handbook .

Here is how the Fixed Contribution works, if you are eligible:

  • A Fixed Contribution of up to 2% of eligible pay will be made to the accounts of eligible participants after the end of the year; for example, this year's contribution would be contributed to your account next year; contributions will generally be posted by the end of the first quarter.
  • You must be employed by Citi or on an authorized leave of absence on December 31 of the Plan Year in order to receive the Fixed Contribution for such year.
  • You do not need to contribute to the Plan to receive a Fixed Contribution.
  • Your Fixed Contributions will be invested in the same investment options as your before-tax contributions.

* If you terminated employment and are subsequently rehired, you may be eligible for a Fixed Contribution based upon the eligibility requirements as determined by the Plan at the time you are rehired.

No matter your financial situation, Citi offers you the following resources to assist you with your money matters.

Free Financial Advice Is Just a Phone Call Away

Did you know you can call an Alight Financial Advisors (AFA) Investment Advisor for free advice on general financial topics like budgeting, managing debt or saving for short-term goals? In fact, getting help with overall financial wellness is one of the top five reasons your colleagues call AFA. Turn to an expert today to help boost your financial well-being!

Retirement Evaluation: Are You on Track?

Each spring, you'll receive a personalized retirement evaluation from Alight Financial Advisors. This evaluation tells you how effective your current retirement savings strategy may be in helping you reach your financial goals. Based on recommendations you receive as part of the evaluation, you may want to consider adjusting your contribution and/or investment strategy.

Financial Wellness Education: Boost Your Knowledge & Earn Rewards

Each quarter, you can watch a 40-minute video on a timely financial topic to grow in financial confidence and earn $15 PulseCash through the Live Well at Citi Program , too — up to $60 for the year! You must watch the entire presentation to earn the reward.

  • Quarter 4 2022 (must be completed by December 28, 2022): Are You On Track Financially? – Identify key goals along your financial journey and learn how to take action toward achieving them.
  • Quarter 1 2023 (must be completed by March 29, 2023): Budgeting for Success – Learn how to create a budget that will help you reach your long-term financial goals.
  • Quarter 2 2023 (must be completed by June 28, 2023): Make the Most of Your Employer-Sponsored Plan – Gain a better understanding of the features of the Citi Retirement Savings Plan and how to get the most from it.
  • Quarter 3 2023 (must be completed by September 27, 2023): Managing Your Debt – Learn how to make and follow through on a plan to reduce your debt for better financial health.

To view these videos, access Financial Health on Your Benefits Resources(YBR)™ available through My Total Compensation and Benefits . 

Alight Financial Advisors (AFA) Investment Advisors

Citi offers general financial advice on balancing debt, budgeting household expenses or saving for a large purchase at no additional cost to you. Speak with an AFA Investment Advisor by calling ConnectOne at 1 (800) 881-3938 . From the ConnectOne “benefits” menu, choose the “401(k) Plans” option, then “Contact an Advisor regarding Investment Advice and Financial Guidance.” AFA Investment Advisors are available 9 a.m. to 9 p.m. ET, Monday through Friday. To learn more about the services available through AFA, visit Your Benefits Resources™ through My Total Compensation and Benefits .

Citi has hired Alight Financial Advisors, LLC (AFA) to provide investment advisory services to plan participants. AFA has hired Financial Engines Advisors L.L.C. (FEA) to provide sub-advisory services. AFA is a federally registered investment advisor and wholly owned subsidiary of Alight Solutions, LLC. FEA is a federally registered investment advisor. Neither AFA nor FEA guarantee future results.

AFA Online Advice

If you are looking for personalized advice on how to strengthen your overall financial health and plan for retirement based on your age, contributions, and risk level, AFA’s online advice can help. Based on your input (which can include your investments outside the Plan), this planning software will provide a retirement forecast of your current account as well as investment and savings recommendations. Get started by accessing your Citi Retirement Savings Plan account online through Your Benefits Resources™ via My Total Compensation and Benefits .

AFA Professional Management Program

If you are looking for assistance with managing your account to help keep you on track for retirement, participate in the AFA Professional Management Program. This service provides a personalized savings and investment strategy recommendation and the ability to have your account proactively managed for you for a fee. Get started by calling an AFA Investment Advisor through ConnectOne at 1 (800) 881-3938 . From the ConnectOne “benefits” menu, choose the “401(k) Plans” option, then “Contact an Advisor regarding Investment Advice and Financial Guidance.” AFA Investment Advisors are available 9 a.m. to 9 p.m. ET, Monday through Friday. Or, learn more about the Professional Management Program online by visiting Your Benefits Resources™ through My Total Compensation and Benefits .

Lipper Fund Fact Sheets

For additional investment advice, view the Fund Fact sheets, prepared by Lipper Inc., a Thomson Reuters company, by visiting My Compensation and Benefits . From the “Want to Get to Our Best in Class Vendors Fast?’ section, select the ‘Retirement Savings/401(k)’. Under the “401(k) Savings Plan” menu, select “Investments.” Then select the “Fund Performance” tab and click on any fund name to view the current Lipper page for that fund.

Alight Financial Education Center

This service is designed to provide you with financial education through the use of articles, videos, decision support tools and calculators at no cost. To access the Alight Financial Education Center, visit the Your Benefits Resources™ website through My Total Compensation and Benefits . From the “Want to Get to Our Best in Class Vendors Fast?’ section, select the ‘Retirement Savings/401(k)’. Under the “Save Well - Education” menu, select the “Financial Education Center”.

When your contributions are “ vested ,” you have ownership and the full right to your account balance, even after you leave Citi.

You are always 100% vested in:

  • Your own contributions
  • The Citi Matching Contribution
  • The Citi Fixed Contribution after three years of employment

Under certain limited circumstances, Citi’s Fixed Contributions will automatically vest.

The Plan allows you to withdraw certain amounts from your accounts while you are still actively employed by Citi.

Withdrawals

IRS and Plan rules specify which of your accounts are eligible for withdrawal while you are employed and under what circumstances. These withdrawals may result in taxable income and/or tax penalties to you.

Amounts are withdrawn pro-rata across all your investment options. The amounts withdrawn may only be in cash. You may wish to consult a tax adviser before taking a withdrawal from the Plan.

The Plan is designed so that your Plan accounts will be available to you at retirement or when you leave Citi. However, you may be able to borrow against your Plan accounts while you are working for Citi by taking a loan from the Plan.

The Plan Administrator will decide whether to grant the loan based on IRS and Plan rules and its decision will be final. You are required to repay any loan taken from the Plan. When you repay these loans, you repay your account with interest over a period of 12 to 60 months.

Note: Any money Citi has contributed since 2017 (for the 2016 Plan year or after) is not available for loan purposes (e.g., Citi Matching, Fixed and Transition Contributions, plus all earnings). The only money that is available for loans is the money you contribute to your account and any Citi contribution made prior to 2017.

You may wish to consult a tax adviser before borrowing from the Plan.

Think Twice Before Taking a Loan from the Plan

Citi recognizes that financial emergencies arise, but a loan from your Plan account should not necessarily be your first option when you are in need of financial assistance. A loan from your Plan account can take a bite out of your retirement savings — possibly jeopardizing the lifestyle you may envision for the future.

Citi wants you to live well and save well; that is why our loan policy ensures Citi’s Matching Contributions remain in your account to help it grow. Be sure to familiarize yourself with your debt reduction options and the effects taking a loan against your Plan account can have on your retirement savings. If you need help with managing your debt, contact AFA for guidance.

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60% of workers consider retirement plans a “must-have” benefit. 1 See how ADP can help you create a plan that both attracts top talent and is easy to manage.

What You Need to Know About State-Sponsored Retirement Plans

If your business is in one of these states – CA , CO , CT , IL , MD , ME , NJ , NM , OR , NY , VA , VT , WA – legislation may have been enacted mandating state-run employee savings programs. You have options! Download our free guide or talk to a retirement specialist today.

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With ADP Retirement Services, you’ll get a team of experienced retirement professionals who are ready to help you evaluate your options:

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401(k) plans and investment choices

A 401(k) is a qualified profit-sharing plan that allows employees to contribute a portion of their wages to an individual account. You can also contribute to employees’ accounts — this is often done through a match of what an employee contributes.

If you choose a 401(k) plan, you’ll need to decide which investment options your employee can choose to invest in. Whether your advisor is providing investment advisory services or you are considering hiring a third party for this support, ADP can accommodate either approach. 2

Our retirement plan solutions meet the unique needs of your business —  no matter how many employees you have. See which fit is right for you.

Learn about our multiple 401k plans

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SIMPLE IRA options for small businesses

Both employees and employers can contribute to a SIMPLE IRA (Savings Incentive Match Plan for Employees). Employee contributions are tax-deferred and employers must make either a matching contribution or a nonelective contribution.

This type of plan can be an attractive option for small businesses since it requires:

  • Less paperwork than a 401(k) plan
  • Fewer compliance burdens
  • No minimum participation

Administrative fees can be as little as $600, and you may qualify for a tax credit for start-up administrative costs. Plus, you can deduct annual employer contributions to the plan as a business expense. 3

For more information about SIMPLE IRAs, contact us .

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SEP IRA options for self-employed individuals and small business owners

If you are self-employed or a small business owner, you can make tax-deferred and tax-deductible employer contributions to a SEP-IRA plan for each employee.

SEP IRAs provide key benefits to business owners:

  • Contribution amounts are flexible
  • Contribution limits are higher than a traditional IRA
  • Contributions are deductible from the employer's income
  • No compliance filings are required

To learn more about SEP IRAs, contact us .

The flexibility to meet your needs and experience to help you make choices

There’s a lot to take in when it comes to sponsoring a retirement plan. At ADP, our experienced professionals listen first to understand your needs. From there we’ll help you evaluate options, make informed decisions, and set up a plan that works for you and your employees.

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Get your employees engaged, informed, and ready for life's financial challenges

About 50 percent of employees save less than $5,000 per year for their retirement. 4 When employees understand their retirement plan benefits, they’re more likely to enroll and use those benefits to their full potential.

Get your employees on the right path to retirement with helpful tools and resources, including:

  • An award-winning employee education program and a team of retirement counselors to help your employees get ready for retirement
  • A Financial Wellness website 6 to help employees plan for life’s financial challenges
  • A Retirement Readiness Score 7 , which helps your employees understand where they are in saving for retirement
  • A targeted mobile-phone messenger that provides important retirement information to employees, and helps them develop better retirement savings habits

With 2 in 3 employees claiming their benefits package helps reduce financial stress 5 , our award winning participant materials , and retirement calculators and tools will be appreciated.

Learn why others work with ADP

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Adp named best employee retirement plan for businesses with 100 or fewer employees by business.com*.

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*Business.com article "Best Business Employee Retirement Plans of 2023" published on April 28, 2023.

† This calculator is for illustration purposes only and should not be construed as tax advice. Please consult with your own tax professional for advice.

Monthly Investment Service Fee: ADP Strategic Plan Services, LLC will impose a fee of .10% of covered assets, subject to a minimum fee of $20.83 per month, as more further described below.

The amount of the tax credit each year is limited. Employers with up to 100 employees may be entitled to an annual tax credit for three years equal to 50% of the costs of starting up and administering a retirement plan and for participant education services. Employers with 50 employees or fewer may be entitled to 100% of the costs for these services. The maximum credit is up to the greater of (1) $500 or (2) the lesser of (1) $5,000 or (2) $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan. An additional credit of $500 per year for the first three years is available to plans that offer an automatic enrollment feature that meets the requirements of an Eligible Automatic Contribution Arrangement (EACA) as defined in Internal Revenue Code Section 414(w)(3.) The maximum credit over 3 years of $16,500 is available to plans that cover at least 20 non-highly compensated employees and offer automatic enrollment.

Additionally, an annual tax credit for eligible employer contributions for five years of up to $1,000 per employee earning $100,000 or less may apply to employers with up to 50 employees but phases out from 51 to 100 employees.

The availability and amount of a tax credit depends on your situation. ADP does not provide tax advice, and you should consult with your own tax professional.

  • 17th Annual U.S. Employee Benefit Trends Study — MetLife, October 2018.
  • ADP, Inc. and its affiliates do not endorse or recommend specific investment companies or products, financial advisors or service providers or engage or compensate any financial advisors for the provision of advice to plans or participants. In assembling and presenting its investment platforms, ADP is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.
  • Please consult your tax advisor to determine if you are eligible for this federal tax credit.
  • The State of Employee Retirement readiness - Retirement Insights, LLC, January 2019.
  • 17th Annual U.S. Employee Benefit Trends Study - MetLife, October 2018.
  • Unless otherwise indicated, educational videos, articles and tools are provided by and are the property of DST Systems, Inc. All other videos, articles and tools are the properties of the third parties named therein. The videos, articles, calculators and tools are for general information only and are not intended to provide financial, investment, tax or legal advice or recommendations, nor are they the sole authority on any regulation, law or ruling. ADP is not responsible for the accuracy and/or content of such materials.
  • IMPORTANT: Retirement Readiness makes no assumption about your tax status, savings, early withdrawal penalties, required minimum distributions and should not be used as the primary basis for any planning decisions. The likelihood of various retirement savings outcomes are hypothetical, do not reflect actual investment results, or market fluctuations and are not guarantees of future results. It does not portray actual investment results or guarantee future results. Results for potential savings scenarios may vary with each use and over time.

Retirement Counselors are registered representatives of ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07932. SIMPLE IRA and SEP are offered through ADP Broker-Dealer, Inc. (ADPBD), Member FINRA, an affiliate of ADP, Inc, One ADP Blvd, Roseland, NJ 07068. Only registered representatives of ADPBD may offer and sell such retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement product. Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans.

Unless otherwise disclosed or agreed to in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. Investment options are available through the applicable entity(ies) for each retirement product. Investment options in the “ADP Direct Products” are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ (ADP BD) or (in the case of certain investments) ADP, Inc. Only licensed representatives of ADP BD or, in the case of certain products, of a broker-dealer firm that has executed a marketing agreement with ADP, Inc. may offer and sell ADP retirement products or speak to retirement plan features and/or investment options available in any ADP retirement product and only associated persons of ADP Strategic Plan Services, LLC (SPS) may speak to any investment management or advisory services provided by SPS or any third party in connection with such ADP retirement products. SPS is a SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services. Nothing in these materials is intended to be, nor should be construed as, advice or a recommendation for a particular situation or plan. Registered representatives of ADP Broker-Dealer, Inc. do not offer investment, tax or legal advice to individuals. Please consult with your own advisors for such advice. ADPRS-20230629-4643

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The Retirement Wellness Planner information and Retirement Wellness Score are limited only to the inputs and other financial assumptions and is not intended to be a financial plan or investment advice from any company of the Principal Financial Group ® or plan sponsor. This calculator only provides education which may be helpful in making personal financial decisions. Responsibility for those decisions is assumed by the participant, not the plan sponsor and not by any member of Principal ® . Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.​

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Save for your future with the RRD 401(k) Savings Plan — and get a matching contribution from RRD!

The RRD 401(k) Savings Plan (also known as the RR Donnelley Savings Plan) helps you save money for your retirement on a tax-advantaged basis. If you are eligible to participate in the Plan, you may set aside and invest pre-tax, Roth 401(k) and/or after-tax money for your future. And, RRD will make a matching contribution to help you grow your retirement account even more.

The RRD Savings Plan has Moved to Fidelity

Fidelity offers:

  • The Fidelity NetBenefits ® website and mobile app to easily access and manage your account.
  • Online planning tools, videos and workshops to help you make decisions for your financial future.
  • A lineup of investment options similar to the current lineup, including target date funds and a self-directed brokerage option.
  • Help from Fidelity’s experienced phone representatives.

Get to Know Fidelity

  • If eligible, you will be automatically enrolled in the Plan when you join RRD, and 5% of your eligible pay will be deducted from your pay on a pre-tax basis. Your contribution will be invested entirely in the Target Date Fund that is most closely aligned with your target retirement date, which assumes you plan to retire at age 65.
  • If you make an affirmative election that you don’t want to participate in the Plan within 30 days after the date your first automatic contribution was made, you may withdraw all your automatic contributions that were made to the Plan.
  • Effective January 1, 2021, if you are currently defaulted into the Plan and you have not made an affirmative election to change your contribution percentage, your automatic enrollment contribution will be set at 5% of your eligible pay. Your investment elections will not change.

Employee Contributions

  • You may contribute from 1% to 85% of your pay as pre-tax, Roth 401(k) and/or after-tax contributions, all through payroll deductions taken each pay period. The total of your pre-tax, Roth 401(k) and after-tax contributions cannot exceed 85% (or annual IRS limits ).
  • If you’re age 50 or older by the end of a given calendar year, you can make additional pre-tax and/or Roth 401(k) catch-up contributions for that year, up to annual IRS limits .

RRD Contributions

If you are eligible, RRD will make matching contributions each payroll period equal to $0.25 for every dollar you contribute to your 401(k), on up to 5% of your pay, as a pre-tax, Roth 401(k) or catch-up contribution. See the Savings Plan Summary Sheet — 401(k) Matching Contributions for details.

Investment Options

The following investment options are available:

  • Core Investment Funds
  • Conservative Income Fund
  • Target Date Funds
  • Brokerage Account

Your Account Earnings

  • Your pre-tax contributions, matching contributions and the earnings on those contributions (as well as the earnings on after-tax contributions) grow tax-deferred as long as they remain in the Plan.
  • On withdrawal, pre-tax and matching contributions, plus earnings on those amounts as well as earnings on your after-tax contributions, are subject to taxes.
  • Earnings on Roth 401(k) contributions grow tax-deferred and, subject to certain limitations, aren’t subject to taxes when you withdraw them.

Loans and Withdrawals

  • In some cases, you may take loans and/or request withdrawals from your account while you remain employed.
  • You can receive a full distribution of your vested account when you leave RRD.

SMM — RR Donnelley Savings Plan

Savings Plan Summary Sheet — 401(k) Matching Contributions

Savings Plan SPD

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Retirement Plan Options for 1099 Employees

Retirement planning can be trickier if you're freelancing. Here are some great account options.

1099 Worker Retirement Options

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Just because you freelance doesn't mean there aren't retirement plans for you.

If you're one of the growing number of independent contractors, retirement planning can sometimes seem daunting given the lack of access to a traditional retirement account like a 401(k). Fortunately, there are plenty of tax-advantaged options available for 1099 workers.

As an independent contractor, a team of advisors can make a big difference to your bottom line in retirement. While doing it yourself is possible, good tax and financial professionals can easily justify their fees due to the savings that come from their advice and expertise. There are many resources now available that enable all contractors to easily get quality financial advice, even with limited funds. Make sure that your advisors are working together to give you an accurate picture.

Your role is to successfully kick off this planning. You should come to the table with the information to create a cash-flow statement. This includes the details for all inflows and accounts payable, as well as outflows such as rent, utilities and insurance. With just a few months of data, you will quickly be able to ascertain key fluctuations in income, as well as to find periods when money is easier to allocate for the future. Your advisors will be able to determine qualifications for qualified retirement plans, where significant tax savings can occur.

The IRS has strict limits on qualifications for these retirement plans. 1099 workers may not be eligible or the allowable contribution may be reduced if they also have W-2 employment or a spouse that has access to a retirement plan. The tax code changes frequently, and only a professional tax advisor can give you specific tax advice. At this time, artificial intelligence is not always able to keep up with the pace of tax changes, so this is another important reason to have a great team assisting you.

Additionally, the SECURE 2.0 Act passed by Congress has numerous new provisions that are coming to bear in 2024, including new penalty-free withdrawals under circumstances such as being the victim of domestic violence, a first-time homebuyer, certified by a physician as being terminally ill or located in a federal disaster area. Qualifying birth or adoption expenses can also receive penalty-free access. These provisions inject an important source of liquidity to a participant who has incurred a major life event or experienced an unforeseen emergency, but they should be reviewed carefully.

Overall, retirement plan options for 1099 workers have grown significantly, and each has its distinct advantages and limitations. Once you are in position to set aside funds, here is a list of popular options:

  • Traditional individual retirement account, or IRA.
  • Simplified employee pension (SEP) IRA.
  • Savings incentive match plan (SIMPLE) IRA.
  • Solo 401(k).
  • Health savings account (HSA).
  • Defined benefit plan.

Traditional IRA

Anyone can establish a traditional IRA. Contributions to traditional IRAs are tax deductible. So, if you put the $7,000 limit for 2024 into an IRA ($8,000 for those age 50 or older), your taxable income for the year decreases by that amount as long as you don't have an employer-sponsored retirement plan. If you are married and filing jointly with a spouse who has an employer-sponsored plan, you can still make the full deduction if your modified adjusted gross income doesn't exceed $230,000.

Funds grow tax-deferred, and retirement distributions will be taxed at your ordinary income tax rate for that year. Additionally, distributions made before age 59 1/2 will be subject to a penalty. Traditional IRAs have required minimum distributions (RMDs) beginning at age 73. Even if you do not need the money, you must take a distribution or incur a substantial penalty. RMDs are calculated using both the person's life expectancy and the IRA account size.

This account is for singles whose 2024 modified adjusted gross income is less than $161,000; married couples who file jointly can make at least a partial contribution if their income is under $240,000. While no tax deduction is associated with a Roth IRA, its high appeal to self-employed participants is that earnings will grow tax-deferred and retirement income from the account will be tax-free. In 2024, if you are less than 50 years old, the maximum contribution is $7,000. Older investors are eligible for an additional catch-up contribution of $1,000, for a total of $8,000.

Under the new provisions in the SECURE 2.0 Act , you may be able to contribute to your Roth IRA with rollover 529 plan assets. This rollover option is not available for traditional IRAs.

Simplified Employee Pension (SEP) IRA

A SEP IRA can be set up for both the employer and the employees of a business to provide a valuable employee benefit. Employees cannot contribute their own money, but their withdrawals are still taxed as ordinary income. The maximum allowed contribution for 2024 is $69,000 or 25% of compensation, whichever is less.

While SEP plans are easy to set up and administer, owners must contribute the same percentage to all their employees as they contribute to their own plan. Like traditional IRAs, withdrawals are taxed as ordinary income and subject to both early withdrawal and RMD rules.

Savings Incentive Match Plan (SIMPLE) IRA

SIMPLE plans vary from SEP plans in that they will allow a business owner's employees to make contributions to their accounts, alongside employer contributions. Contributions are tax deductible, and this can result in a lower tax bracket overall. Business owners love SIMPLEs because they can offer a desirable employee benefit very inexpensively without the need for plan administration services. Retirement income is taxed like a traditional IRA. The SIMPLE IRA employee contribution limit is $16,000 in 2024. There is also a $3,500 catch-up contribution available to workers who are age 50 or older.

Solo 401(k)

This plan, called the "One Participant 401(k)" by the IRS, allows solo business owners to enjoy the benefits of a corporate 401(k). The plans are reserved exclusively for the owner (and their spouse, if applicable) who has no employees and earns a maximum of $345,000. In 2024, you can contribute a maximum of $69,000, and an additional catch-up contribution of $7,500 is available to those 50 or older. Deductibility and income taxes upon distribution depend on whether the business owner selects a traditional plan or the Roth option. A plan administrator is needed, and those fees can add as much as $2,000 to the cost, depending on the provider.

In these plans, the business owner is considered both as the employer and the employee for contribution purposes. These limits apply within the overall maximum contribution:

  • Employee   contributions are to a maximum of $23,000 in 2024, or 100% of compensation, whichever is less. A catch-up contribution of $7,500 is available to those 50 and older. 
  • Employer   contributions are made as an additional profit-sharing contribution. This contribution is 25% of either compensation or net self-employment income. The latter is calculated as net profit less half of self-employment tax and the plan contribution made as an employee. 

Health Savings Account (HSA)

HSAs are the unsung heroes for the self-employed because they not only enable one to save for retirement, but they also allow the business owner to accumulate funds on a tax-advantaged basis to pay for qualified health, dental, vision and pharmacy expenses. An HSA is established with a qualified high-deductible health plan. There are no taxes on the contributions, the account growth or any distributions that pay for qualified expenses not reimbursed by the health plan provider. All contributions are vested and assets are carried over at the end of the year.

An HSA cannot be set up if you have multiple health care plans or you are enrolled in Medicare, or if you can be claimed as an dependent on another person's tax return. In 2024, the maximum HSA contribution is $4,150 for an individual and $8,300 for a family. HSAs are also eligible for a $1,000 catch-up contribution, although the qualifying age is a bit higher, at 55 or older.

Defined Benefit Plan

These pension plans are among the oldest in the tax code, but they fluctuate in and out of favor depending on the economy. With inflation keeping pressure on interest rates, they are coming back in vogue.

Defined benefit plans provide guaranteed income in retirement. Higher contribution limits can also provide significant tax deductions, especially if an older business owner has the capability to make consistent contributions for a set period.

These plans can be complex, making them expensive to administer. Additionally, not all businesses are good candidates for this type of plan. A financial advisor is invaluable to determine if this is a viable option for a business and to recommend plan administration services.

The Takeaway

There are now more retirement options for 1099 workers than ever, increasing the complexity of making the best decision for you and your business or side gig. A great CPA, working alongside your financial advisor , can quickly help you select the best option. Additionally, they can combine these plans, such as crafting a backdoor Roth IRA, to generate additional tax savings that will allow you to put even more money away for retirement. Most importantly, they can also make sure that you truly qualify for a particular option and take your distributions properly, given all the IRS boxes that have to be checked.

How to Open a Roth IRA

Brian O'Connell Jan. 25, 2024

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Tags: money , investing , retirement , IRAs , 401(k)s

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M any view the start of a new year as a time to make changes in their lives. This can include getting more organized, paying off debt, or creating a new budget. It's also a great time to review your retirement strategy or develop a savings plan if you haven't already started.

One of the first things you'll need to do is decide which retirement account(s) you want to use. Here are three of your best options going into 2024.

A 401(k) is a great place to start if you qualify for a 401(k) match. This is free money your employer gives you for contributing to your retirement account. If you qualify for one, claiming it should be your top priority going into 2024.

Talk to your employer if you're unsure how its company matching formula works. Typically, you get $1 or $0.50 for every dollar you put into your retirement account, up to a certain percentage of your income. Once you know this, work out how much you must set aside each pay period in order to claim the full match. Try to set aside at least this much in 2024.

If your company doesn't offer a match, a 401(k) can still be a great home for your savings if its fees aren't too high and it offers investment options you like. You can contribute up to $23,000 to a 401(k) if you're under 50 in 2024 or $30,500 if you're 50 or older. So this is a strong contender for those who want to set aside large sums for retirement.

IRAs are great options for those who don't have access to a 401(k) through their employer. They're also good fits for those who want more freedom to invest how they want, rather than being limited to a number of funds their employer selects.

IRAs have lower contribution limits -- just $7,000 in 2024 for adults under 50 and $8,000 for adults 50 and older. But you're free to invest in just about anything, and this gives you a lot more control over how much you're paying in fees.

You can also choose when you want to pay taxes on your savings. Traditional IRAs give you a tax break in the year you make your contributions, but you pay taxes on your withdrawals in retirement. This could be a good fit for those who anticipate being in a lower tax bracket in retirement. If this isn't the case for you, consider a Roth IRA . You'll pay taxes on your contributions upfront, but you'll get tax-free withdrawals in retirement.

3. Health savings account (HSA)

A health savings account (HSA) isn't actually a retirement account, but you can use it that way if you'd like. Contributions to these accounts reduce your taxable income for the year just like 401(k) and traditional IRA contributions. But as a bonus, you also get tax-free medical withdrawals at any age.

Only those with individual health insurance plans with a deductible of $1,600 or more or family plans with a deductible of $3,200 or more are eligible to contribute to an HSA this year. They can set aside up to $4,150 with a qualifying individual plan or $8,300 with a qualifying family plan. And those 55 and older can add $1,000 more to these limits.

If you plan to use this money for retirement savings, avoid medical withdrawals if possible. Save up for this in a savings account instead. You should also think about investing your savings to help that money go further.

You can use more than one

You're free to combine two or more of the retirement accounts above together if this suits you better. For example, you might save in a 401(k) until you've claimed your full match. Then, you can switch to your IRA and if you max that out, move onto your HSA if you're eligible. 

Just make sure you have some sort of strategy in place as we head into 2024. Without one, you run the risk of missing out on valuable savings opportunities, and that could set your retirement plan back a long way.

The $21,756 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $21,756 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies .

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The 3 Best Retirement Accounts for 2024

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Here are the 401(k) and ira contribution limits for 2024, there's more room to max out your retirement accounts this year..

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A new year means a new opportunity to boost your retirement savings. Increasing contributions to your 401(k) or IRAs can get you there, but you should be aware of the limits.

The IRS sets annual caps on contributions to both workplace and individual retirement plans. These limits fluctuate to keep up with inflation, though they may not change from year to year.

The 401(k) and IRA contribution maximums did increase for 2024, however, which means Americans can contribute even more to their nest eggs.

What we'll cover

401(k) contribution limits for 2024, ira contribution limits for 2024, which retirement account should you contribute to, bottom line, compare investing resources.

Workers who contribute to a 401(k), 403(b), most 457 plans and the federal government's  Thrift Savings Plan  can contribute up to $23,000 in 2024, a $500 increase from the $22,500 limit in 2023. Spread evenly across 12 months, that's a cap of about $1,917 a month, or $958 per twice-monthly paycheck.

The limit on additional catch-up contributions for employees 50 or older is $7,500, the same as in 2023. So, for those individuals, the total 401(k) contribution cap is $30,500.

The maximum contribution set by the IRS doesn't include what your employer can contribute in matching funds. The limit on combined employee and employer contributions is $69,000, up from $66,000 in 2023.

The catch-up contribution for employees 50 and older who contribute to a SIMPLE IRA remains $3,500.

More help: How to save for retirement with a 401(k)

Some 401(k) plans allow employees to make after-tax contributions to reach the combined employee and employer contribution limit.

For example, say you maxed out 401(k) contributions in 2024 and your employer matched, that would only bring you to $46,000. If your plan allows, you could make additional after-tax contributions of up to $23,000 to meet the combined employee/employer limit of $69,000 for the year. Unless rolled over to an IRA, the earnings on these after-tax contributions are tax-deferred, so tax is due when you withdraw.

The limit for both traditional and Roth IRAs is $7,000 total from among all accounts, a $500 increase from the $6,500 limit in 2023. That breaks down to roughly $583 a month, or $292 per twice-monthly pay period.

Individuals 50 or older can make an additional $1,000 catch-up contribution, bringing their total IRA contribution limit to $8,000.

The income thresholds to be eligible for a Roth IRA are also higher in 2024. For single and head-of-household taxpayers, the income phase-out range is between $146,000 and $161,000, up from between $138,000 and $153,000 in 2023.

Married couples filing jointly have a higher income phase-out range, too, between $230,000 and $240,000, up from between $218,000 and $228,000.

For married couples filing separately, the income phase-out range remains between $0 and $10,000.

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.  Sign up here .

Because 401(k) plans have higher limits than IRAs, it's usually a good idea to enroll in a 401(k) if your employer offers one — especially if they match contributions. A 401(k) allows you to defer paying taxes until you withdraw funds in retirement, letting your money grow tax-deferred.

You should also consider adding a Roth IRA . Contributions are typically made with after-tax money, which means your withdrawals later are tax-free. The different tax advantages and withdrawal options available in a 401(k) and a Roth IRA can help keep your retirement portfolio diversified .

Even if you don't have access to a 401(k), a Roth IRA is still a smart choice — especially if you expect to be in a higher tax bracket when you retire.

You can find Roth IRAs at many top brokerages. We like the Roth IRA options that Fidelity offers since savers can choose to have Fidelity pick and manage their investments via the Fidelity Go ®  Roth IRA option or they can do it themselves.

Fidelity Investments

Minimum deposit and balance.

Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen

Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

Find special offers here

Investment vehicles

Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other:  Fidelity Investments 529 College Savings; Fidelity HSA ®

Investment options

Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

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Extensive tools and industry-leading, in-depth research from 20-plus independent providers

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Charles Schwab is also a Gold Standard choice when looking for retirement-saving vehicles. Schwab can help you decide what IRA is right for you and offers retirement tools like planning calculators .

Charles Schwab

Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One ®  Brokerage Account. Automated investing through Schwab Intelligent Portfolios ® requires a $5,000 minimum deposit

Fees may vary depending on the investment vehicle selected. Schwab One ®  Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

Robo-advisor: Schwab Intelligent Portfolios ® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account ® (PCRA) Brokerage and trading: Schwab One ®  Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

Stocks, bonds, mutual funds, CDs and ETFs

Extensive retirement planning tools

Both 401(k) plans and IRAs are key savings tools for a healthy retirement. Make the most of their benefits by contributing the maximum amount allowed this year.

Why trust CNBC Select?

At  CNBC Select , our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every retirement article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of investing products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Want to land your dream job in 2024? Take CNBC's new online course  How to Ace Your Job Interview  to learn what hiring managers are really looking for, what to say and not to say, and the best way to talk about pay.

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How the IRS Taxes Retirement Income

It's important to know how common sources of retirement income are taxed at the federal and state levels.

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Navigating taxes in retirement can be challenging. Your tax situation may differ from your working years due to income and tax bracket changes. Required withdrawals from retirement accounts and income from other sources can also affect your tax liabilities.

That’s why it's crucial to know how common sources of retirement income are taxed. Having this information can help you develop a tax-efficient strategy for your retirement years. 

Also on Kiplinger: Tax Season is Here: Seven IRS Changes to Know Before You File

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Is retirement income taxable?

Comprehensive retirement planning involves considering various sources of income and understanding how they are taxed at the federal and state levels. But thankfully, not all income is considered taxable income . For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn't subject to tax at the state level.

Still, your tax planning should consider the tax treatment of income from annuities, pensions, Social Security benefits , and retirement savings accounts. You will also want to assess tax liability from various investments, earnings, and proceeds.

Here's a breakdown of some common retirement income sources and a brief description of their federal tax implications. ( More below on state taxes on retirement income. )

How some income in retirement is taxed

Social Security Benefits: Depending on provisional income, up to 85% of Social Security benefits can be taxed by the IRS at ordinary income tax rates.

Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions.

Interest-Bearing Accounts : Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.

Sales of Stocks, Bonds, and Mutual Funds: Long-term gains (held over a year) are taxed at 0%, 15%, or 20% capital gains tax rates , based on income thresholds. Net investment income tax ( NIIT ) factors in for some taxpayers. at a rate of 3.8%.

Dividends: Qualified dividends are taxed at long-term capital gains rates; non-qualified dividends are taxed as ordinary income based on your federal tax bracket.

Traditional IRAs and 401(k)s : Contributions to traditional IRAs and 401(k)s reduce your taxable income. However, withdrawals are taxed at ordinary income rates. Required minimum distributions (RMDs) start at age 73. Withdrawals before age 59 ½ are subject to a tax penalty.

Roth IRAs and Roth 401(k)s: Contributions to Roth accounts are not tax-deductible. However, withdrawals after five years following the first contribution are tax-free for Roth IRAs , including gains. Withdrawals before age 59 ½ are subject to a tax penalty.

Life Insurance Proceeds: Life insurance proceeds are generally not subject to tax when received as a beneficiary . However, surrendering a policy for cash may have tax implications.

Savings Bonds: Bond interest is generally taxable at ordinary income rates upon maturity or redemption but may be tax-free for education expenses if certain conditions are met.

Annuities: For annuities , the portion representing the principal is tax-free; earnings are taxed at ordinary income rates unless purchased with pre-tax funds.

Home Sales: Primary home sale gains up to $250,000 ($500,000 for married couples) are excluded from income tax if specific ownership and use criteria are met.

Which states do not tax retirement income?

Crafting a tax-efficient retirement strategy requires careful consideration of various income sources and their tax implications. 

  • Seek professional guidance if you need help making decisions that maximize your retirement funds and minimize tax burdens.

Also, note that while this article focuses on federal taxes on different types of retirement income, it is essential to consider the impact of state and local taxes on your finances. (There are more than a dozen states that don't tax retirement income .) 

To learn more about how all 50 states and the District of Columbia tax retirement, see Kiplinger’s report on Taxes in Retirement .

  • States That Tax Social Security
  • These States Won't Tax Your Pension Income
  • How All 50 States Tax Retirees

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist. 

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