Other retirement accounts

Your employer might offer a plan that's similar to a 401(k) but has a different name. You might have access to a:

• 403(b) plan if you work at a school, hospital or other nonprofit organization
  
  
  
• 457 plan if you work for a state or local government
  
  
  
• Thrift savings plan if you work for the federal government or one of the companies that offer them
  
  
  
• SIMPLE if you work for a company with fewer than 100 employees
  

Each of these plans works in much the same way that a 401(k) does, and each is just as beneficial to your retirement planning. You contribute part of your pretax salary, which reduces what you owe in taxes now, and you make investment choices for your assets, which accumulate tax-deferred earnings. Eventually when you withdraw the money, usually after you retire, you owe tax on your withdrawals at the same tax rate that you pay on other income.

Contribution limits

There's a government-imposed limit on how much you can contribute to your plan each year. For 2005, the maximum contribution is $14,000 for a 401(k), 403(b) or 457 and $10,000 for a SIMPLE. You can also make a catch-up contribution of up to $4,000 — $2,000 in the case of a SIMPLE — if you're 50 or older and your plan allows them. Thrift plan contribution limits vary depending on the specific plan, but are also capped at $14,000.

In some cases, your employer may limit your contribution at a certain percentage of your salary.There may also be a limit imposed on people who earn more than $95,000. Employees in that category are defined by the government as being highly compensated (HCE, or highly compensated employee), and the percentage of salary they can contribute each year is determined by the percentage of salary that lower-paid employees of the same company contribute. You have to abide by the restriction that sets the lowest limit.