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Chapter 1. What Is a 401(k)? > What Kinds of Protective Shell Retirement Plans ... - Pg. 9

What Is a 401(k)? Plan Type Can You Contribute? How Much Can You Contribute? Plus for Age 50+ 2002/05: $500 2006+: $1,000 SIMPLE IRAor 401(k) Pre-tax and after-tax Under Age 50 2002: $7,000 2003: $8,000 2004: $9,000 2005: $10,000 Plus for Age 50+ 2002: $500 2003: $1,000 2004: $1,500 2005: $2,000 2006: $2,500 Yes; required You Employer Contributions Who Benefits from In- vestment Return? 9 You've probably noticed that there are more types of protective shells than Intel has chips. All pro- tective shells get their rules from the Code. And the Code gets its rules from Congress. Therefore, you would think that all defined-contribution plans at all types of employers (for-profit, nonprofit, government, and so on) would operate under the same set of rules. Right? Sorry, that would make too much sense. But things are changing. Beginning in 2002, you'll see similarities among 401(k), 403(b), and 457 plans. To help you untangle this mess, we've given you some all- purpose descriptions of the most common defined-contribution plans and where they can be found. At least you'll know what kind of plan you have--no matter where you work. · 401(k) plans--Mostly found in for-profit organizations, both private (not listed on a stock ex- change) and public (stock is traded). In 1997, nonprofit employers began offering 401(k)s to their employees as well. Participants may contribute up to $10,500 on a pre-tax basis in 2001. A matching employer contribution is common at most companies today. · 403(b) plans--Also known as TSAs (tax-sheltered annuity plans) or TDAs (tax-deferred annuity plans). Most common in nonprofit institutions such as hospitals, public school systems, univer- sities, colleges, charitable organizations, and associations. In the past, a matching contribution from nonprofit employers was rare, and so was participation from employees. Both will become more common now that 403(b)s have gained parity with 401(k)s. · 457 plans--Found in government institutions, some local schools, and state university systems. Until 2002, employee contributions were capped at $8,500 and employees couldn't roll over 457 plan distributions like they could with 401(k) or 403(b) plans. But all that changes in 2002. How- ever, a match is very unusual, and your contributions might not reduce your state income taxes. · SIMPLE 401(k) plans--Savings Incentive Match Plans for Employees. Intended for companies with fewer than 100 employees. They operate the same as regular 401(k)s but have much less paperwork; the boss also must contribute to an employee's account. Employees can contribute up to $6,500 in 2001. These plans are relatively new (since 1997), so the jury is still out on whether they'll catch on. · SEP plans--Simplified Employee Pension. Mostly used by self-employed individuals who may work for different employers throughout the year. Seeps are really individual retirement accounts (IRAs) that allow employer contributions.