Employer Sponsored Retirement Plans - Don't Throw Away Free Money - by Jennifer Hester Hall
Would you throw away free money? If you aren’t participating in your employer sponsored retirement plan you may be doing just that! Today, many employers sponsor some kind of retirement plan as a means for their employees to save for their retirement and build their nest eggs. Investing in an employer-sponsored retirement savings plan is one of the best ways to save and prepare for retirement. Compared to other savings plans available to private sector workers, plans such as a 401(k) have several good reasons to participate.
Reason #1 – Tax Deferral (Two Ways)
First and foremost, contributions are deducted from your paycheck before taxes are taken out, thereby reducing the amount of your current income that is subject to taxes. It follows that you will pay less in current income taxes and probably put more into retirement savings. Second, contributions grow on a tax-deferred basis. Any tax on investment earnings in a 401(k) retirement plan is deferred until you start drawing on the money. This leaves more money in your account and creates the potential for your retirement savings to grow faster than they would in a taxable investment account where earnings are taxed each year.
Reason #2 – Automatic Payroll Contributions
With this feature, your saving habit becomes automatic. If you have difficulty putting money aside each month, this does it for you by sending money from your paycheck directly to your 401(k) retirement plan. No need to remind yourself to transfer money from your checking account.
Reason #3 – Higher Contribution Limits
You can contribute to both a 401(k) and an IRA to build your retirement savings. While each has contribution limits, you can contribute more to a 401(k) account than to an IRA. The contribution limit for employees participating in a 401(k) retirement plan is $18,000 for those up to age 49 for the 2016 tax year and the catch-up contribution limit for participating employees aged 50 and over is $6,000. Contributions to an IRA are limited to $5,500 for the 2016 tax year. The catch-up contribution for individuals aged 50 and over is $1,000. So, if you’re over 50, and a supersaver, that could be $24,000 plus $6,500 in retirement savings for a total of $30,500!
Reason #4 – Employer Contribution Match
Many 401(k) retirement plans are designed with a matching contribution provision. By contributing at least the same percentage as your company’s match, you can double your 401(k) contribution up to this amount. However, a company has complete discretion as to whether or not they match your contribution. During the economic downturn, some companies stopped making matching contributions though many of those have resumed doing so as the economy has improved. The absence of a company matching contribution should not be an excuse for not participating in the retirement plan.
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