If you're fortunate enough to have access to them, there are a variety of employer savings plans that can offer multiple routes to saving for retirement. That’s fortunate because retirement security is an elusive goal for many Americans. According to the Employee Benefit Research Institute’s 2017 Retirement Confidence Survey, 39% of American workers are not too or not at all confident about their ability to save enough for their later years. 

Having access to an employer’s plan at work can help to strengthen your financial outlook for the long term. Depending on your employer, those options may include a 401(k), a 403(b), a 457 plan, a savings incentive match plan for employees (SIMPLE IRA) or a simplified employee pension (SEP IRA). Additionally, some employers offer another tool for tax-advantaged saving: the health savings account (HSA). Understanding these savings tools is important for building a solid retirement plan. (For more, see 5 Companies with the Best Retirement Plans.)

Employer Savings Plans: 401(k) vs. 403(b) vs. 457 Plans

There are two broad categories of employer savings plans: defined-benefit plans and defined-contribution plans. Defined-benefit plans are traditional pension plans. Employees receive a set amount of benefits at retirement with these plans, either in a lump sum or an annuity, based on their years of service, age and earnings history. With a defined-contribution plan, however, retirement benefits are based on the amount contributed by the employee, and, if matching contributions are offered, their employer. According to the U.S. Bureau of Labor Statistics, 47% of private companies offer some kind of defined-contribution plan, while just 8% of private companies offer defined-benefit plans. 

The 401(k), 403(b) and 457 plans all fall under the defined-contribution umbrella. A 401(k) plan is the most popular offering; such plans can be used by businesses both large and small. The 403(b) plan is designed for employees of tax-exempt organizations who qualify for 501(c)(3) status, public school employees, individuals who work for cooperative hospital organizations and certain ministers. Employees who work for state and local governments or certain nonprofit organizations may have access to a 457 plan.

Employee Contributions and Employer Matching

Each plan has similar annual contribution limits. For 2018 they are as follows:

 

Annual Contribution Limit

Catch-Up Contribution for Savers 50 and Older

401(k) plans

$18,500

$6,000

403(b) plans

$18,500

$6,000

457 plans

100% of the participant’s includable compensation or $18,500

$6,000

If your employer offers a 401(k) or 403(b) in tandem with a 457 plan, it’s possible to use both to save for retirement, up to the maximum annual contribution limit for each plan. These limits don’t include matching contributions.

Employer contributions are optional with all three plans, and the Internal Revenue Service limits how much employers and employees can contribute altogether. For 401(k) and 403(b) plans the total contribution limit for 2018 can’t exceed $55,000 ($61,000 for employees making catch-up contributions). For 457 plans total contributions are limited to the lesser of 100% of the participant’s includable compensation or $18,500. 

Tax Advantages

Contributions to a 401(k) or 457 plan aren’t included in your taxable income. Contributions to a 403(b) are tax deductible. The money you put into all three accounts grows tax deferred until you begin making withdrawals in retirement. Distributions are subject to your ordinary income tax rate.

Both 401(k)s and 403(b)s are qualified plans, meaning early withdrawals before age 59½ are subject to a 10% early withdrawal penalty. You’d also owe income tax on early withdrawals. With a 457 plan you wouldn’t pay the 10% penalty, but you’d still pay taxes on distributions. (For more, see Retirement Savings: Tax-Deferred or Tax-Exempt?

Saving for Retirement with a SIMPLE or SEP IRA

Both SIMPLE and SEP IRAs can be established by businesses of all sizes. However, they may be used more often by smaller firms that want to offer employees a retirement option with lower administrative costs.

With a SEP IRA the employer contributes to the plan on behalf of the employee. Those contributions are limited to 25% of the employee’s compensation or $18,500 for 2018. With a SIMPLE IRA both employers and employees can make contributions to the plan. Employee contributions can’t exceed $12,500 for 2018. There’s also a $3,000 catch-up contribution for savers 50 and older. Employers must make matching contributions to a SIMPLE IRA according to one of two formulas:

  • dollar-for-dollar for up to 3% of compensation for employees who contribute to the IRA, or 
  • 2% of compensation for all eligible employees, whether they contribute or not

Both of these scenarios have very specific requirements. To learn more, click here for details from the IRS. 

As a SEP IRA is funded by the employer, there’s no immediate tax benefit to employees, unless they’re funding a SEP on their own behalf because they’re self-employed. In that scenario they’d be able to deduct their contributions for the year.

With a SIMPLE IRA the contributions aren’t included in your taxable income for the year. Both accounts follow the withdrawal rules for traditional IRAs. Growth is tax deferred until you make withdrawals in retirement. The 10% early withdrawal penalty kicks in for withdrawals made before age 59½.

Supplementing Employer Retirement Plans with a Health Savings Account

A health savings account isn’t a retirement account per se, but it can be used to supplement your retirement savings. These plans are associated with high-deductible health plans, and they’re designed to be used as savings accounts for future healthcare costs.

An HSA offers a dual tax benefit, in that contributions reduce your taxable income and withdrawals for qualified medical expenses are 100% tax free. For 2018 the contribution limit is set at $3,450 with individual coverage and $6,900 for workers with family coverage.

So how does an HSA fit into your retirement picture? While these accounts are intended to be used for healthcare expenses, you can withdraw the money for virtually anything. However, there may be a tax penalty. Nonqualified withdrawals before age 65 are subject to a 20% tax penalty plus regular income tax. After age 65, however, you can withdraw HSA money for any purpose without a penalty. You’ll just pay income tax on those withdrawals. (Again, if the withdrawals are for health expenses, you won't pay income tax on that money.) How to Use Your HSA for Retirement provides more information.

The Bottom Line

Your employer’s savings plan can be an invaluable retirement planning tool. Knowing what your options are, how much you can contribute and which tax advantages your plan yields can help you make the most of the money you’re saving.