If you are thinking about which retirement plan you should apply according to the needs of your company and employees, you must know certain basic aspects and abbreviations that you will see wherever you research.
Over the years, the U.S. public administration has developed plans and laws that seek to encourage savings and, at the same time, help its citizens to have a plan that allows them to enjoy their old age without the economic worries. They spent so many years working for a reason, right? That is why it is important for you to know all the most important retirement savings options that exist.
Main Retirement Savings option abbr
Deciding on a retirement Savings option can be challenging if you don’t have the necessary information. It is much more difficult if you are not familiar with the terminology and abbreviations. One small solution is to visit the official IRS website (yes, here we go with the abbreviations), where you will get all the information you need.
However, they also use a lot the initials of some program or plan to mention them, so, basically, you should have a glossary so you don’t get lost while looking for the answers you need. Make a note of the most important abbreviations here:
- RSA: Retirement Savings Account
- IRS: Internal Revenue Service
- IRA: Individual Retirement Account
- SARSEP: Salary Reduction Simplified Employee Pension
- SEP: Simplified Employee Pension
- SIMPLE: Savings Incentive Match Plan for Employees
As you can see, there are not many, but so many letters are sometimes difficult to remember, even if it is something as crucial as your retirement savings plan. However, having them handy will be useful until you manage to learn them or go to a bank and decide which is the best option for you or your company’s employees.
What is a retirement Savings account?
To have a secure future, you must have a retirement Savings account (RSA). This is nothing more than an account that will allow you to save a percentage of your salary that will serve as a fund when you reach the right age and wish or must retire from working life.
As I already mentioned, on the IRS website you will get all the information you need to decide the type of account you want to use for your savings.
It is important for you to know that the Internal Revenue Service is the federal service responsible for collecting federal taxes in the U.S; that is why there you will find all the information regarding the different options offered by this office.
What is the best option for your retirement plan?
There are several options available and choosing the one that best suits you is easy if you have the right information. First, you must know what the IRA is; this is nothing more than an Individual Retirement Account that allows you to save for the long term and at the same time offers you certain advantages when it comes to paying federal taxes.
This was designed for those who are self-employed (freelancers, for example) and do not have access to the retirement funds that an employee does. There are many types of IRAs and keeping up to date with each of their features will allow you to decide the most appropriate option.
Is a SIMPLE IRA a good investment?
If you are a start-up company, yes. This is available for those who are employees of small businesses (less than 100 workers).
In the case of the latter, employers are required to make an annual contribution without having to file the nondiscrimination testing (NDT) (a process in which employers prove that they do not apply for some form of discrimination at the time of payment) or declare the annual form.
In addition, it is inexpensive and easy to access, except that in this case the employees share the responsibility, not just the employer. However, this type of account limits you, since if you are an employer you cannot have another retirement plan.
What is the difference between a SARSEP and a SEP?
The Salary Reduction Simplified Employee Pension (SARSEP) was a pension plan that was used at the turn of the last century for small businesses with fewer than 25 employees annually, provided they met certain requirements.
This program offered the facility to deduct the contributions for the retirement fund from the employee’s salary. Now, I am sure you are wondering why I am telling you this if it is no longer applicable. The truth is that those companies that employed it before 1997, by law, can continue to offer it.
On the other hand, the Simplified Employee Pension (SEP) can be established by those who are self-employed or for companies regardless of the number of employees on their payroll. In this case, only employers can contribute, but they do not have to file the annual form.
Unlike other plans, this one allows employers to contribute to their retirement accounts as well. In addition, it is easy to use and has flexible annual contribution amounts. However, it requires that the amounts to be contributed to all eligible employees must be the same.
Are there other Retirement Savings options?
Yes. One of the most widely used is the 401(k) Plan; once the employee agrees to be part of the plan, a portion of their gross income will go directly into an investment account, which is equivalent to a tax deduction. It is designed for companies of any size and allows the simultaneous use of other retirement plans.
| Plan | Details |
| 401(k) Plan | It is designed for businesses of any size and allows other retirement plans to be used simultaneously. |
| SIMPLE 401(k) | Allows employees to defer a portion of their compensation according to certain restrictions. |
| Payroll Deduction IRA | Ideal for those who work in companies that do not purchase any type of retirement plan. |
| 403(b) Tax-Sheltered Annuity Plan | Used by public schools, churches and universities. |
On the other hand, there is the SIMPLE 401(k), which is designed for businesses with 100 or fewer employees. It allows employees to defer a portion of their compensation according to certain restrictions. It does not allow you to work with other retirement plans and gives you a two-year grace period if you are a growing company.
Finally, there are other options such as the Payroll Deduction IRA for those who work in companies that do not purchase any type of retirement plan. There is also the 403(b) Tax-Sheltered Annuity Plan, which is adopted by certain public schools, universities, and churches.
References
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“Choosing a Retirement Plan: Plan Options | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-plan-options
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“Choosing a Retirement Plan: SIMPLE 401k Plan | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-401k-plan
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Fernando, Jason. “What Is a 401(k) and How Does It Work?” Investopedia, Investopedia, https://www.investopedia.com/terms/1/401kplan.asp
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“Retirement Savings Accounts.” Investopedia, https://www.investopedia.com/retirement-savings-accounts-4689692
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“Salary Reduction Simplified Employee Pension Plan (SARSEP) | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/retirement-plans/plan-sponsor/salary-reduction-simplified-employee-pension-plan-sarsep
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“SIMPLE IRA Plan | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan#choose
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“Simplified Employee Pension Plan (SEP) | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep#choose