Which Retirement Plan To Participate In

If you are a participant in your company's pension or profit-sharing plan, you are automatically enrolled in the plan after working more than a thousand hours a year and working for the one or two-year period of time required to make you eligible to participate.  You will not have to elect to reduce your salary or otherwise make any employee contribution to the plan.  Your employer will automatically make contributions to the plan on your behalf.

If your company sponsors a Section 401(k) Plan for which you are eligible to participate, the company will typically make a matching contribution based on your employee contribution.  You will execute a salary reduction agreement indicating the extent of your employee contribution.  Recall the Examples I gave you a few pages ago under the description of Section 401(k) plans and why you must maximize your contributions to this plan if you are eligible to participate.

Section 403(b) Annuity 

This retirement plan will be your next best choice.  If you are eligible to participate in a Section 403(b) Annuity, restudy the Roth IRA analysis I just gave you a few pages ago - the Roth may trump your 403(b) Annuity as a preferred vehicle – at least up to the annual Roth funding limit of $3,000 per year.

 IRAs

Last but not least we have the Individual Retirement Account.  To the extent that you are not constrained by the AGI limitations noted under the earlier discussion of IRAs (on page 78), you can contribute up to $3,000 to a Roth or up to $3,000 a traditional IRA (but not more than $3,000 to both – your total contributions to a Roth and Traditional IRA in any one year can't exceed $3,000).  As mentioned on page 79, your spouse can generally make an additional $3,000 contribution to an IRA.  To the extent you are contributing to a traditional IRA (as opposed to a Roth IRA), and are also eligible for and making contributions to the Section 403(b) annuity, you must reduce the maximum contribution to the Section 403(b) annuity by the amount you contributed to the traditional IRA.