6 Tax-Advantaged Ways to Save for Retirement

Some fortunate employees get multiple types of retirement accounts at work.


Less than half of workers have access to a 401(k) or similar type of retirement account at work. Just 41 percent of private sector employees participated in an employer-sponsored defined contribution plan in March 2010, according to a recent Bureau of Labor Statistics report. Here are the six most common types of retirement plans. Some fortunate employees are even offered more than one of these retirement accounts.

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Savings and thrift. A savings and thrift plan such as a 401(k) is the most common type of retirement benefit, making up 64 percent of all retirement plans in 2009. Management and professional workers (70 percent) and employees of companies with 100 or more workers (70 percent) were the most likely to have access to this retirement benefit. Employees may contribute a flat amount or a percentage of pay up to $16,500 in 2011, or $22,000 at age 50 or older. These accounts can be used to defer or pre-pay taxes on your retirement savings. Sometimes companies match all or a percentage of worker contributions. Matches tend to vary significantly from company to company.

Deferred profit sharing. Firms may give employees a fixed or discretionary share of company profits using a deferred profit-sharing plan. Contributions can be spread equally among all employees or based on the employee’s salary. Almost a quarter (23 percent) of employees with retirement plans participated in a deferred profit sharing plan in 2009. Sales and office workers (28 percent) and production, transportation, and material moving employees (26 percent) have the highest utilization of this type of plan.

Money purchase pension. Employers typically contribute a fixed amount of employee earnings to a money purchase pension plan. Some plans also allow worker contributions, but employees are not required to make them. About 18 percent of workers have this type of pension plan, with union members (37 percent) and natural resources, construction, and maintenance workers (25 percent) being the most likely to have this retirement benefit.

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Savings incentive match plan. This retirement account is specifically for small businesses. Only employers with 100 or fewer employees who do not have any other retirement plans may set up a savings incentive match plan (SIMPLE), either as part of a 401(k) or an IRA. While the plan is relatively uncommon overall (4 percent), employees of small companies with less than 100 workers (9 percent) and sales and office workers (5 percent) are the most likely to have access to it.

Employee stock ownership. An employee stock ownership plan (ESOP) facilities worker access to company stock and allows workers to capture a portion of the company’s success. Funds in the plan are distributed to employees according to a formula in retirement. However, only about 4 percent of workers have access to an ESOP.

Simplified employee pension. Only the employer contributes to a simplified employee pension (SEP). Just 2 percent of workers have these company-paid individual accounts held at a financial institution. Employers may contribute any amount each year, as long as deposits are made for each eligible employee and do not exceed annual limits set by the IRS.

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There are two different ways these retirement accounts shield your retirement savings from taxes. Traditional retirement accounts that give workers a tax break in the year they make a deposit (82 percent) are far more popular than Roth accounts that allow after-tax contributions (22 percent). Roth accounts allow you to pay the taxes upfront, and withdrawals made after age 59½ from accounts at least five years old are tax-free. Not all retirement plans offer a Roth option. Workers at large companies (26 percent) are more likely to have access to Roth accounts than workers at smaller establishments (17 percent).

Twitter: @aiming2retire