Once you have estimated your retirement saving needs, the next step is to decide what kind of saving plan you would need to save the money. Depending on whether you are employed, self-employed or otherwise, there are a number of tax efficient saving plans. These plans have very different requirements in terms of eligibility, amount of contribution you can make, rules regarding the withdrawal of funds, and other considerations. The following two sections provide a comparative snapshot of these plans.

SEP IRASIMPLE IRASIMPLE 401(k)401(k)Roth 401(k)403(b)Roth 403(b)457Profit Sharing (incl ESOP)Money PurchaseDefined Benefit
EligibilityMust include employees: 1) Age 21+; 2) employed 3 of last 5 plan years; 3) earn at least $550 in the current year21 years of age, Employer is required to let you enroll within 1 year of service21 years of age, Employer is required to let you enroll within 1 year of service21 years of age, Employer is required to let you enroll within 1 year of service21 years of age, Employer is required to let you enroll within 1 year of serviceEmployee of a tax-exempt religious, charitable, or educational organizationEmployee of a tax-exempt religious, charitable, or educational organizationGovernment employees
Employee contribution limitsLesser of 25% of compensation or $52,000$12,500$12,500$18,000$18,000$18,000$18,000$18,000 ( During last 3 years prior to retirement contribution limit gets doubled.)No employee contributionGenerally no employee contributionGenerally no employee contribution
Annual catch-up contribution limits if age 50+ at year end (2009)None$2,500$2,500$6,000$6,000$6,000$6,000$6,000NoneNoneNone
Employer contribution limitsEmployer: 20% of income up to annual compensation limitLower of 25% of annual compensation limit or 100% of annual compensation
Annual employee + employer contribution limitsBased on above$12,500$12,500$53,000$53,000$53,000$53,000$53,000$53,000$53,000$53,000
Annual compensation limit$265,000$265,000$265,000$265,000$265,000$265,000$265,000$265,000$265,000
Federal tax treatment (contributions)Employee pre-tax, Employer pre-taxEmployee pre-tax, Employer pre-taxEmployee pre-tax, Employer pre-taxEmployee contributes after taxEmployee pre-taxEmployee after taxEmployee pre-taxEmployer pre-taxEmployer pre-taxEmployer pre-tax
Vesting Schedule100% vested at all timesCheck employer's summary plan description. All vested after 3 years in one go gradually vesting 20% each year 2 through 6. Check employer's summary plan description. All vested after 3 years in one go gradually vesting 20% each year 2 through 6. Check employer's summary plan description. All vested after 3 years in one go gradually vesting 20% each year 2 through 6. Check employer's summary plan description. All vested after 5 years in one go gradually vesting 20% each year 3 through 7.
Penalty for early withdrawals (before age 59 1/2)10% of withdrawal amount10% (but 25% for withdrawals within 2 years of beginning participation in plan)10% (but 25% for withdrawals within 2 years of beginning participation in plan)10% of withdrawal amount10% of earnings withdrawn10% of withdrawal amount10% of earnings withdrawnNo 10% penalty although withdrawal is subject to ordinary taxes10% of withdrawal amount10% of withdrawal amount10% of withdrawal amount
Penalty free early withdrawalsIn service withdrawals after 2 years of serviceDeath, disability, and plan termination Unlike Roth IRA, no first time home buyer withdrawal available.Allow in-servicewithdrawalsAfter separation from service and 55 years of age.Death, disability, and plan termination
Loan provisionLoan up to the lower of 50% of account balance and $50,000. Loan term is generally 5 years.Can take a loan, unusaul though.
Income tax reporting of distributions for annual filingForm 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1Form 1040, p. 1
Annual income tax compliance reporting of distributionsForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-R
Record keeping guidelines for individualsLog annual non-deductible for state purposesLog annual non-deductible for state purposesLog annual non-deductible for state purposes
Required distributions age70.570.5None70.570.5None
Income tax reporting of contributions for annual filingForm 1040, p.1Form 1040, p.1Form 1040, p.1W-2, Form 1040W-2, Form 1040W-2, Form 1040W-2, Form 1040W-2, Form 1040None
Annual income tax compliance reporting of contributions and account values (informational)Form 5498Form 5498Form 5498Form 5500Form 5498Form 5498Form 5500Form 5500Form 5500
Other featuresDoes not allow 10-year forward averagingAllow 10-year forward averaging

Traditional IRARoth IRASEP IRA (Simplified Employee Pension)Rollover IRASIMPLE IRASelf-employed 401(k)
EligibilityUnder age 70 1/2 at year end and with earned incomeAny age with earned incomeSelf-employed (Sch C net income)Other employer retirement plans can be consolidated into a Rollover IRASelf-employed (Sch C net income)Self-employed (Sch C net income)
Annual individual/employee contribution limits$6,000$6,00020% of net Sch C incomeN/A$18,000
Annual catch-up contribution limits if age 50+ at year end1000$1,000NoneN/A$2,5005500
Annual employee + employer contribution limitsN/AN/AN/AN/A$12,500$53,000
Annual compensation limitN/AN/A245000N/A245000
Annual income tax compliance reporting of distributionsForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-RForm 1099-R
Record keeping guidelines for individualsLog annual non-deductible contributions separately for federal and state purposesLog annual non-deductible contributions separately for federal and state purposesLog annual non-deductible for state purposesN/ALog annual non-deductible for state purposesLog annual non-deductible for state purposes
Penalty for early withdrawals (before age 59 1/2)10% of tax deferred amounts (not including basis)10% of earnings withdrawn0.10.110% (but 25% for withdrawals within 2 years of beginning participation in plan)0.1
Allowable early withdrawalsWaived on medical expenses related withdrawal that exceeds 7.5% of adjusted gross income.First time home buyer withdrawal of 0 available. Medical expenses related withdrawal that exceeds 7.5% of adjusted gross income.Medical expenses related withdrawal that exceeds 7.5% of adjusted gross income.Death, disability, and plan termination. Medical expenses related withdrawal that exceeds 7.5% of adjusted gross income.Medical expenses related withdrawal that exceeds 7.5% of adjusted gross income.Death, disability, and plan termination
Withdrawal orderFirst to come out is contribution, then any conversion amount. Earnings come out last.
Loan provisionLoan up to the lower of 50% of account balance and $50,000Can take a loan, unusaul though.
Required distributions age70 1/2None70 1/270 1/270 1/2

IRA contribution restrictions: Income phaseouts by tax filing status

SingleParticipant in the employer plan
Traditional IRARoth IRA
Phaseout starts at the MAGI of of$61,000$116,000
Complete phaseout at the MAGI of$71,000$131,000

Married Filing JointlyParticipant in the employer plan
Traditional IRARoth IRA
Phaseout starts at the MAGI of$98,000$183,000
Complete phaseout at the MAGI of$118,000$193,000

Spousal IRA when spouse is a participant in the employer plan
Traditional IRARoth IRA
Phaseout starts at the MAGI of$183,000$193,000
Complete phaseout at the MAGI of$183,000$193,000
  • Once you have decided the plan that you wish to save under, the next step is to implement the plan.
  • Individual or self employed:...Show details
    • Open an account for that plan with a reputed financial institution.
    • Contribute money to this account either by writing a check, or via money transfer. By default, this contribution will probably go into a safe money market fund.
    • Based on your risk profile and time you have left to retire, you need to develop a portfolio of mutual funds and decide what percent of your contribution needs to go to a particular mutual fund. Most financial institutions have a set of questionnaires to assess your appetite for risk taking. Based on your risk profile and time horizon, they provide you directions on building a diversified portfolio of different asset classes (e.g. Large Cap, Mid Cap, Small Cap, Growth, Value, etc.), that suits your needs.
    • To build your portfolios, decide on 4 or 5 mutual funds based on their performance history, asset class, and annual expenses. Read the fund prospectuses carefully before deciding on the funds.
    • Invest regularly and rebalance your portfolio every year or so.
  • Employed:...Show details
    • The additional step for employed people is to make sure that they take advantage of their employer-sponsored retirement plan first. Once you have maxed out there, individual plans would be other options to consider.
    • The portfolio building process is similar to individuals and self-employed. However, the investment choices may be limited by the employer.
    • Most importantly, make sure you contribute as much as possible in order to take advantage of your employer's matching contribution.