Types of Retirement Plans in India
Planning for retirement ensures that people are not stranded on account of lack of finances at a later date. Some retirement plans are sponsored by employers, while others are ideal for self-employed individuals.
Employer Sponsored Retirement Plans
Simplified Employee Pension (SEP): This plan is appropriate for small business undertakings with less than 25 employees. Self-employed people who desire retirement plans that can be administered with less paperwork and minimal IRS reporting and disclosure, can also opt for this plan. The vesting schedule for this retirement plan is immediate. Any employee who is more than 21 years of age, and has been with the firm for three of the preceding five years is eligible to receive contributions. The employee isn't expected to contribute. Employer contributions are tax deductible, and the employer can decide on the amount of contribution. An employer can contribute the minimum of 25% of employee compensation or $49,000.
SIMPLE IRA retirement plans: These retirement plans are ideal for employers managing a workforce of less than 100 employees. Employee contribution isn't mandatory. The employer has to contribute regardless of whether the employee contributes. The employer can choose to make matching or non-elective contributions.
401(k) retirement plans: In case of company 401(k) plans, employee contributions grow tax deferred and there are strict penalties for early withdrawal. Companies generally offer one of the following: Traditional 401(k), Safe harbour 401(k) or SIMPLE 401(k) plan. Some companies also offer a Roth 401(k) plan that allows the participants to make either a pre-tax or an after tax salary deferral contribution. The employee contribution limits for all the 401(k) plans is the same. The maximum annual 401(k) contribution limits for employees over 21 but less than 50 years of age, has been set at $16,500. People over the age of 50 are allowed to contribute a maximum of $5,500 as catch-up contribution.
In case of traditional 401(k) plans, employee salary deferrals are optional but subject to non-discrimination tests, in order to ensure that the plan does not benefit only highly compensated employees. The employer may choose to match employee elective deferrals or/and make a discretionary profit sharing contribution.
In case of Safe harbour401 (k) plans, employee salary elective deferral contributions are not subject to non-discrimination tests but employer contributions are mandatory. Employer contributions can be matching or non-elective.
A SIMPLE 401(k) retirement plan is similar to a Safe harbour 401(k) plan. The employer is expected to make fully vested annual contributions. Unlike Traditional 401(k) plans, the SIMPLE 401(k) plan is not subject to non-discrimination tests. This plan is suitable for business units employing fewer than 100 employees. For both traditional and safe harbour 401(k) plans, the number of employees is not a constraint.
Retirement Plans that are Not Employment Based
Individual retirement accounts (IRAs) can be of the following types: Roth IRA, or Traditional IRA. In case of a Traditional IRA, a person makes pre-tax contributions that grow tax deferred until retirement. In case of a Roth IRA, a person makes after-tax contributions.
One should consciously make an effort and save for retirement plans, so that one can enjoy those golden years without having to worry about finances.