Pre-Tax Savings Plans

Employer Retirement Plans

Q. Why is it better to save in a pre-tax savings plan than through a regular bank savings account, for example?
A. The key benefit in a defined contribution plan is that you are able to save money on a pre-tax basis, and the earnings on your savings are tax-deferred. Because of compound interest, the tax benefits will help you save more money during your working years. Currently, the money you contribute — and any interest those contributions earn — are not taxed until it's withdrawn. This means more savings for you than in an after-tax savings plan where you have to pay taxes before you put the money in and then every year on any earnings. Another reason is for the company match, if your employer has one.

Q. What are the differences among all the employer retirement plans?
A. A 401(k) plan is an employer-sponsored retirement plan that permits employees to contribute part of their pay into the plan and defer taxes on that income until withdrawn, usually at retirement. Money contributed to the plan may be partially matched by the employer, and investment earnings within the plan accumulate tax-free until they are withdrawn. The 401(k) is named for the section of the federal tax code that authorizes it.

A 403(b) plan is similar to a 401(k) plan, but designed for public employees and employees of nonprofit organizations. These plans can also be called tax-sheltered annuities (TSAs) or tax-deferred annuities (TDAs).

A 457 plan is designed for government employees.

A Keogh plan is a tax-deferred savings plan for individuals who are either self-employed or in a partnership. The account can be set up as a profit sharing or money purchase plan. A Money Purchase Keogh plan requires a defined annual contribution, while contributions to a Profit Sharing Keogh plan are discretionary.

A simplified employee pension, or SEP, is an employer-sponsored retirement plan.

A TSA plan is a tax-sheltered annuity, also called TDA or tax-deferred annuity.

Q. Why are my Plan's limits less than the IRS limits?
A. Your employer's Plan may have to set lower limits — not because they necessarily want to, but to ensure they pass certain other tests set up by the regulations.

Q. What are the legal limits for a 401(k) Plan?
A. In the year 2004, you can contribute up to $13,000 (plus a $3,000 catch-up contribution for certain individuals aged 50 or over for plan year 2004) unless your employer's Plan limits you to less. And, contributions cannot be made to a plan after your pay from all eligible sources reaches $205,000. The IRS reviews these limits annually.

Note: Your employer's Plan may have to set lower limits — not because they necessarily want to, but to ensure they pass certain other tests set up by the regulations.

Q. What should I do if I meet the $205,000 limit?
A. Generally, it' a good idea to contribute the maximum allowed, either $13,000 (plus a $3,000 catch-up contribution for certain individuals aged 50 or over for plan year 2004) or your Plan limit, before you reach $205,000 in eligible compensation. You will have to contribute at the highest savings rate you can as soon as you can. To reach your retirement income goal, GuidedSavings may suggest you save additional after-tax dollars.

Q. What happens if I earn over $205,000?
A. Once you earn that amount, contributions to the Plan have to be cut off. This may cause you to contribute unevenly. There is nothing you can do about this limit. However, you should make sure you contribute the maximum allowed, either $10,500 or your Plan limit, before you reach $205,000 in eligible compensation. Eligible compensation is defined by your Plan.

Q. What happens to the money I put in the Plan?
A. Money put into a qualified plan trust is subject to certain plan rules and government regulations. An account within the Plan trust is established under your name. Your savings go into your account within the Plan trust. A key advantage of a Plan trust is that the money is protected from your employer and your employer's creditors.

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Company Match and Profit Sharing Plans

Q. What is an employer match?
A. A Plan that has an employer match means that your employer puts money in your individual account up to a certain limit usually based on how much you contribute. This is a wonderful benefit and great way to add to your retirement savings. You can find information about your match, if your employer has one, within GuidedSavings.

Q. Should I contribute the same amount every pay period or put in more at the beginning of the year?
A. There's no one right answer for this question because it depends on how much you earn and how much risk you want to take. See the next Q&A.

Q. How does it depend on what I earn?
A. If you will not hit the IRS savings limits for the year and you want to maximize your company's match, then you should contribute evenly throughout the year preferably at least at the rate up to which your employer matches. For example, if your employer matches your contributions up to 6% every pay period, then you should contribute at least 6% each pay period throughout the course of the year.

Q. What happens if I don't contribute evenly?
A. Let's say you contribute 12% for 6 months and then stop contributing. If your employer matches 6% periodically throughout the year, then your employer will only match when you contribute and then only up to 6%. You will be matched up to 6% for the months you contribute 12%. For the rest of the year you won't get anything, that is $0 in matching funds. If you had contributed 6% evenly, you would have gotten the match all year — every time the company matched. For more information you may want to contact your HR representative or call your Plan Provider.

Q. What if I contribute less than the percent or amount my employer matches?
A. If you contribute less than what your employer matches, then you will still be matched but you will not get as much money as someone who contributes up to the match amount. For example, if your employer matches up to 6% and you contribute 3%, you will get the match for 3% only. Or, if your employer matches the first $400 you contribute, then they will match you at $200 if you only contribute $200.

Q. What if I earn enough money, so I max out at the limits?
A. You may hit the maximum contribution amount early in the year and therefore contribute unevenly. For example, if you earn $130,000 and contribute 15% you will hit the $13,000 limit in eight months. That means you will contribute 15% for eight months and 0% for four months. Because you are contributing unevenly you may not maximize on the company match. You may want to figure out what lower percentage will allow you to contribute evenly for the whole year before you hit the $13,000 limit. In this example, the participant could contribute 10% evenly, if the Plan allows it.

There is another limit to be concerned about. If you earn over $205,000, contributions to the Plan have to be cut off. This may cause you to contribute unevenly. There is nothing you can do about this limit. However, you should make sure you contribute the maximum allowed, either $13,000 or your Plan limit, before you reach $205,000 in eligible compensation. Eligible compensation is defined by your Plan. Click the Pre-tax Savings Info or the After-Tax Savings Info button within GuidedSavings for more information.

Q. What did you mean when you said maximizing the match depends on how much risk I want to take?
A. You could decide that you would rather invest more money early in the year and forget about maximizing the match. In an upward moving market, the earnings you receive on investing earlier may be greater than the match you give up, depending on the match amount. However, the tradeoff only works in your favor if the market moves up and earns you more than you would have earned on your match — a relatively high-risk proposition. The match is almost always a much lower risk proposition.

Q. Is it always best to maximize the match?
A. There is a tradeoff. You may want to contribute the plan maximum early in the year to get the money earning returns for you. In an upward moving market, the earnings you receive on investing earlier may be greater than the match you give up, depending on the match amount. However, the tradeoff only works in your favor if the market moves up and earns you more than you would have earned on your match — a relatively high-risk proposition. The match is almost always a much lower risk proposition.

Q. What is a profit sharing plan?
A. In a profit sharing plan, an employer shares a portion of its profits with some or all of its employees. If you're fortunate to have a profit sharing plan, you can learn more about it by clicking the Profit Sharing Info button within GuidedSavings.

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IRA Information

Q. What is an IRA?
A. An IRA is an individual retirement account. Depending on your income level and eligibility, this tax-sheltered account permits investment earnings to accumulate tax-deferred until withdrawn, usually at retirement. An IRA is not set up through your employer.

Q. What is a rollover IRA?
A. A rollover IRA accepts money from an employer plan after you leave that company. Rollover IRAs have special rules and regulations. For additional information, we suggest you consult a tax adviser.

Q. What is a deductible IRA?
A. A deductible IRA enables you to contribute up to $3,000 annually (plus a $500 catch-up contribution for certain individuals aged 50 or over for 2004) and deduct that amount from your taxable income amount, as your income permits. Additionally, the earnings on the account are not taxed until you take the money out of the account. Each type of IRA has its own rules and regulations. For additional information, we suggest you consult a tax adviser.

Q. What is a non-deductible IRA?
A. A non-deductible IRA enables you to contribute up to $3,000 annually (plus a $500 catch-up contribution for certain individuals aged 50 or over for 2004) , but you cannot deduct the contribution from your taxable income amount. The advantage is that the earnings are not taxed until you take the money out of the account. Each type of IRA has its own rules and regulations. For additional information, we suggest you consult a tax adviser.

Q. What is a Roth IRA?
A. A Roth IRA is non-deductible and enables you to contribute an amount annually, but you cannot deduct the contribution from your taxable income. The advantage is that the earnings are tax free if you do not take the money out until a certain number of years have passed. Roth IRAs have unique rules and regulations. For additional information, we suggest you consult a tax adviser.

Q. What are the income limits for a regular (rollover, deductible, non-deductible) IRA?
A. Each type of IRA has its own rules and regulations. For additional information, we suggest you consult a tax adviser.

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