The traditional 401(k) is probably the most widely known retirement product on the market. It's the most robust of retirement plans. It's generally defined as one that lets a business owner and employees make consistent, tax-deferred contributions during the length of their careers. What does this mean? Here's a practical example:
Joe Shmo Gross Income: $50.000/yr.
Joe Shmo 401k savings: -$16.500
Joe Shmo pays IRS on: $33.500
Joe Shmo basically paid himself $16.500, tax free - until he withdraws the money from the retirement account to pay for his sweet Bass Boat! If Joe is over 50 years old, he can defer up to $22.000 per year. Not a bad nest egg for retirement.
401(k)s not only offer higher contribution limits than most other plan options, but also offer more choices in design to manage business costs and program saving goals. You can choose to match or not, provide a vesting schedule, enable penalty-free access to funds via a loan if an emergency arises.
Simplified Employee Pensions, more commonly referred to as SEPs, are also a popular retirement plan choice as they offer a contribution limit that's similar to a 401(k). It doesn't have all the bells and whistles of a 401(k) plan, but it's still a pretty good option. One of the most important things to understand about SEPs is that 100 percent of the contributions made are by the employer (no employee contributions allowed) and these dollars are immediately vested for the employee. There is no Roth option, no loan option, no profit sharing option, and no catch-up contributions for those over 50 years of age like there are with a 401(k). But it is also cheaper to run and manage. This is a good choice for a small company with few to no employees.
The SIMPLE IRA, or Savings Incentive Match Plan for Employees allows both employer and employee to contribute to the plan, the employer must match and matching is vested immediately. Also, the employee contribution limit is set at $11.500 for 2011, a full $5.000 less than a 401(k). The catch-up for those over 50 is also less at $2.500 versus $5.500 for a 401(k). It also doesn't have Roth or loan options, but like the SEP, avoids those pesky IRS tests and reporting requirements of a 401(k).