You'll need more than your Social Security benefits to support you during retirement. You probably are beginning to understand that you are ultimately responsible for providing for your own retirement needs. Benefits from employer-sponsored retirement plans must be added to Social Security benefits and may produce most of the funds you need for a comfortable retirement. Many employers offer retirement plans. When you invest a portion of your earnings in a retirement plan, you can postpone paying taxes on those earnings until you withdraw the money, usually after you retire.

Some people, especially older workers, have defined-benefit plans, but most have defined-contribution plans. The defined-benefit plans of the past have been almost entirely replaced by defined-contribution plans in large companies.

Defined-Benefit Plan
Defined benefit plans were the typical "pension plans" offered by employers. Your employer guarantees you a specific dollar amount after you've worked for a certain number of years. Years ago it was very common to work for one company for his or her entire working life. The company rewarded the employee for years of service by setting up and funding a pension for his or her retirement years. Today it would be rare to stay with one company for one's entire career. Companies don't want and can't expect to offer an employee a career. Few employees today have a defined-benefit plan, but if you are one of those few, add that anticipated pension income to your financial plan for retirement.

Defined Contribution Plan
In this type of employer-sponsored plan, the contribution amounts, not the future benefits, are set in advance. You or your employer, or both, contribute to your retirement account each year. The benefit amount is not guaranteed because it depends upon the amounts that are contributed and how well the investments perform. You, however, have contribution and investment options-so you have more control. What are these plans?

• 401(k). This most popular plan is offered by for-profit companies, typically with 21 to 100 employees.



• 403(b). This plan is offered by nonprofit organizations, public education, and state and local hospitals. The 403(b) is sometimes referred to as a TSA (tax-sheltered annuity) or TDA (tax-deferred annuity).



• Section 457. The defined-contribution plan for state and local government employees. Federal government employees have different plans: the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS).



• SEP-IRA. Simplified Employee Pension (SEP) plans are offered by small businesses, typically with 5 to 20 employees and gross revenues under $2 million. The employer makes all of the contributions to this plan, unless the plan was started before 1996 and had a salary-reduction provision.



• Simple IRA. Savings Incentive Match Plans for Employees (SIMPLE) plans offered by small businesses allow both employer and employee to make contributions. Employees are able to contribute up to $10,500 annually in 2007, with a cost-of-living increase adjustment every year thereafter. Employees age 50 and over can make additional catch-up contributions of $2,500 in 2007 (with the cost-of-living adjustment every year thereafter). Employers must match employee contributions up to 3 percent of an employee's salary.

Join a Plan to Reach Your Goals
If you have the opportunity to participate in one of these defined-contribution plans, take it. It's a great way to fund your retirement. Retirement plans will be an important part of your plan to reach your financial goals for retirement.

Read the Summary Plan Description and review your annual statements. Companies are required to explain the plans to you and, if you are a plan participant, you have the responsibility to learn about and understand this additional piece of your financial future. Note that if you’re employer has a 401(k) plan, then the employer may automatically enroll you into a lifecycle type account unless you specifically direct them (usually in writing) not to do so (this is a new feature based on the Pension Protection Act of 2006).

Features of Defined-Contribution plans

Tax Deferment
When you participate in one of these employer-sponsored retirement plans, you don't pay taxes on the portion of you salary you put into the plan. You'll pay taxes later, when you take it out. Because the effect of putting money into your retirement account is to reduce your salary, your current income-tax deductions will be reduced.

Employer Matching
Some plans and some employers allow for the employer to match a portion of your contributions. This is free money for your future. Take it! There are limits to the total amount that you and your employer can contribute. Check with the benefits office in your company to determine the current limits.

For a 401(k) and 403(b) plans, you have to work for an organization for a certain length of time to have rights to the company match. This is called being vested, and often it takes five years or more to become totally vested.

Money Grows Tax-Free
The money is deposited in an account in your name and grows tax-free until you either retire or leave your job. If you leave your job before you retire, you can "roll" the money into an Individual Retirement Account (IRA) or possibly into a new employer's retirement plan to maintain the tax-deferred status. If you transfer money directly from a previous employer's retirement plan to a rollover IRA, you won't have to pay taxes on the money until you withdraw it later. If you cash out your defined contribution plan (e.g. do not roll into another plan or leave at your previous employer), then you will have to pay state and federal income taxes, and a 10% “penalty” tax.

Under the Pension Protection Act of 2006, the 10% penalty for early distributions from an IRA or pension plan is waived for military reservists and national guardsmen who are called to active duty for at least 180 days. Withdrawn amounts may be repaid to the IRA or pension plan within two years of the distribution without regard to the annual contribution limits. Check with a representative of First Command or your local JAG for assistance.

Choice of Payments
When you retire, you will be able to choose between a lump-sum payout and an annuity (regular payments for as long as you live). You'll need an accountant or another financial advisor to help you with this important decision. There are advantages and disadvantages to both decisions.

Hardship Withdrawals
If you need the money before retirement, you can withdraw it if you meet certain hardship rules. These include paying medical expenses, avoiding eviction or foreclosure on your principal residence, paying college tuition, and covering funeral expenses for a family member. The withdrawals are subject to income taxes and penalties, so don't withdraw money unless you don't have any other choice. Withdrawals now change what you can do in the future.

Fund Loans
Some plans allow you to borrowing against the money in your retirement account. The company sets the policies and conditions for this, and you should think very hard and be very careful about either borrowing against or withdrawing early from your retirement account. Again, the money you spend today is money you won't have when you retire.