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Employer Plans

IF YOU WORK for a larger employer, you might be offered a 401(k), 403(b) or 457 plan. In general, private sector companies offer 401(k) plans, nonprofit and educational institutions offer 403(b) plans, and government organizations offer 457 plans. All operate under roughly similar rules.

The 2020 and 2021 contribution limit for these plans is typically $19,500. Those age 50 and up can make an additional catch-up contribution of $6,500, for a total of $26,000 in both 2020 and 2021. Any matching employer contribution doesn’t count toward these annual limits. Some companies also offer profit-sharing plans, which are funded solely by the employer, with no money expected from you.

If you work for a small employer, you might have access to a SIMPLE IRA. (SIMPLE is an acronym for Savings Incentive Match Plan for Employees.) The 2020 and 2021 contribution limit is $13,500, with those 50 and up able to contribute an additional $3,000, for a total of $16,500. Employers are required to either contribute 2% of an employee’s pay to a SIMPLE IRA or, alternatively, match 100% of each employee’s contribution, up to 3% of pay.

If you’re self-employed, you could fund a SEP IRA. (SEP stands for Simplified Employee Pension.) You can contribute as much as 20% of your net self-employment income, up to $57,000 in 2020 and $58,000 in 2021. You can make this contribution even if you are covered by, say, an employer’s 401(k) at another job. Alternatively, if you’re self-employed, you might consider a solo 401(k), where the 2021 total contribution that you can make, as both employer and employee, is also capped at $58,000. On top of that, those 50 and older can make a $6,500 catch-up contribution, for a total of $64,500 in 2021.

For most folks, funding their employer’s plan should be their top financial priority each year, not least because of the potential matching employer contribution. Failing to contribute isn’t the only danger, however. You should also watch out for high costs and pay heed to vesting provisions if you’re considering a new job. In addition, think twice before taking out retirement plan loans.

Next: Employer Match

Previous: Step 1: 401(k) and IRA

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