Use employer's retirement plan

Radio Transcript, 2 minutes 50 seconds, for use during week of Jan. 28.

Description:  Penny and Susan talk about investing for retirement through your place of employment

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection trust, providing investor education on the web at: investorprotection.org.

Susan: Penny, I have some questions for you about saving for retirement and about the retirement plans my employer offers.

Penny: Excellent.  Taking advantage of retirement options at work can be a good way to save for retirement.

Susan: We have a 401(k) and I put money into this plan.  I’ve heard other people talk about 403(b) and 457 plans.  Could you talk a little about how these plans work?

Penny: 401(k), 403(b), and 457 plans are all defined contribution plans.  You may also hear them referred to as salary reduction or tax deferral plans.  Your contributions to the plan are pre-tax contributions.

Susan: So, that means I don’t pay taxes on the money I invest in my 401(k) plan?

Penny: Yes.  With a defined contribution plan, you’re saving on your tax bill and investing for retirement at the same time.  Earnings under these plans aren’t taxed until you withdraw the money during your retirement.

Susan: What’s the difference between a 401(k), a 403(b) and a 457 plan?

Penny: Well, they’re all defined contribution plans.  401(k) plans are available to employees of many private companies, like the one you work for.  403(b) plans are available to public school teachers and employees at non-profits.  457 plans are for state and municipal workers.  The plan names come from the sections of the Internal Revenue Code that authorize them.

Susan: How are defined compensation plans different from ordinary pension plans?

Penny: Traditionally, company pension plans have been what are called defined benefit plans, where the employer promises a specific benefit, which takes into consideration an employee’s years of service and salary.  Defined contribution plans define the contributions that you and your employer make; the amount available at retirement – in other words your “retirement check” -- depends on how that money is invested.

Susan: Thank you, Penny.  As always your information is very helpful.

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’