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Understanding Pros and Cons of Retirement Plans

Saving for the future is at the forefront of everyone’s mind after the financial burden of the past year. Employees are looking for ways to maximize their savings and prepare for their future and retirement. There are a lot of different retirement plans on the market today, and understanding the different types of plans will help employees prepare for the road ahead, as well as help employers make the best decision regarding retirement plan options.



One of the most common types of retirement plans is the 401(k). 401(k)s are employer-sponsored and offered to employees as a benefit of working for the company. The deductions are taken from the employee’s paycheck and typically pre-taxed (meaning they are deducted on the gross income amount before taxes are withheld). Most companies will also offer a contribution match, up to a certain percentage, adding more funds into the employee’s account each paycheck.[1]


Investment options for 401(k) plans are limited. Since the plan is employer-sponsored, employees only have the option to select from the investment plans their employer selected. These plans also have contribution limits imposed by the IRS each year. For 2021, the contribution limit is $19,500 if under the age of 50, and $26,000 if 50 years of age or older.

Another item to consider is how long it will take employees to be completely “vested” in their plan. This means that although the employer is matching employee contributions, most plans require an employee to work for the employer a certain number of years before the employee is permitted to take the employer contributions with them if separated from the company. There are also penalties for withdrawing any of the funds before the age of 59.5 and the withdrawn amount would be subject to state and federal taxes.[2]

Individual Retirement Accounts (IRA)


Another common option is an IRA account. With an IRA, employees are responsible for opening, contributing, and managing the plan. This plan is generally used if an employer does not offer a 401(k), or the employee has maxed out their 401(k) contributions for the year. Employees can use their IRA to invest in stocks, bonds, mutual funds, exchange-traded funds, and other investments once funds are available. If they choose, employees have the freedom to hire a professional to manage the investments for them. Most IRA contributions can be deducted from income tax, if the employee doesn’t also have a 401(k), reducing the total amount of taxable income for the year. As the invested funds in the IRA grow, they will be tax-deferred (not subject to taxes).[1] IRAs can also be used to rollover and consolidate 401(k) amounts from previous employments.[2]


There is a contribution limit annually of $6,000 for 2021 if under the age of 50, and $7,000 if 50 years of age or older. While employees don’t pay taxes on the investment gains, they will pay taxes on both the amounts contributed and gained when the funds are withdrawn at retirement. There is also a penalty fee for withdrawing funds before the age of 59.5.[2]

Roth IRA


The main difference between an IRA and a Roth IRA is Roth IRA contributions are made after-tax. The balance in the account will grow tax-free and will be withdrawn tax-free at retirement. There is also no penalty fee for withdrawing funds from the account before the age of retirement.[1]


Similar to the IRA, Roth IRAs have contribution limits, and those limits are the same amounts as the traditional IRA (for 2021, $6,000 if under the age of 50 and $7,000 if 50 years of age or older). Roth IRAs also have income limits. An employee’s ability to contribute will start to phase out as their gross income reaches $122,000 ($193,000 if a joint filer on Form W-4). Because the funds are contributed after-tax, employees do not have the option to receive income tax deductions for their contributions.[2]

Roth 401(k)


A Roth 401(k) is a combination of a traditional 401(k) and a Roth IRA. This plan is offered through employers and contributions are made after-tax. If you remain in the plan for five years, contributions and earnings are never taxed again. There is no income limit with a Roth 401(k), and contributions are the same as a traditional 401(k), with the difference being after-tax rather than pre-tax.


There is still a penalty for withdrawing funds before retirement. The funds will be subject to taxes if the employee withdraws prior to the five-year commitment, prior to the age of 59.5, or for any reason other than disability, or death.[3]

Savings Incentive Match Plans for Employees (SIMPLE) IRA


The SIMPLE IRA is set up by the employer and they are required to contribute on the employee’s behalf. However, the employee is not required to contribute to the account. This is a retirement plan that small businesses with up to 100 employees can offer and operates similar to a 401(k). Employee contributions are made pre-tax and any investments will grow tax-deferred. Employers contribute 2% of the eligible employee’s salary—whether or not the employee contributes—and if the employee does elect to contribute, the employer match is up to 3%.[2]


This plan is only available to businesses with 100 employees or less. While the contributions are pre-tax and the funds will grow tax-deferred, the employee will pay taxes on the funds upon withdrawal at retirement.  The contribution limits for employees are often lower than that of a traditional 401(k). There is also a 25% penalty fee for withdrawing funds before the retirement age of 59.5.[2]

Harbor America offers a wide variety of employee benefits through our PEO services, including a PEO-sponsored 401(k) plan. Through our plan, we remove the headache of searching for the right plan, administering the plan to employees, and reporting and auditing contributions from the employer. Our team of benefits experts will assist employees in setting up their plan and contributions, and make the best decisions for their future.



[1] The Balance- Six Types of Retirement Plans You Should Know About

[2] SoFi- Understanding the Different Types of Retirement Plans

[3] NerdWallet- Roth 401(k) vs. 401(k): Which is Best for You

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