Employer-sponsored retirement plans: What you need to know


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If you’re an employee, you know that saving for retirement can be a challenge. Saving money is difficult, especially if you aren’t sure where to place it to grow. 

The National Retirement Risk Index revealed that 50% of Americans are at risk of struggling to afford the cost of living after retirement. One option for retirement savings is an employer-sponsored retirement plan. Many employers offer these types of plans, allowing employees to save money for retirement in a tax-advantaged account.

What is an employer-sponsored retirement plan?

An employer-sponsored retirement plan is a retirement savings account offered by (many) employers. This type of account allows employees to save money for retirement in a tax-advantaged account. 

Employer-sponsored plans can come in various forms, such as 401(k) plans, 403(b) plans and 457 plans. These plans allow employees to save money in a tax-advantaged account. This means that you can contribute pre-tax money to your retirement account, which lowers your taxable income. The idea is that you’ll reduce your taxes today when you’re in a higher tax bracket and withdraw taxable distributions at a later date, at a potentially lower tax rate.  

Employers may also offer matching contributions, which can help boost your savings even more. Matching is kind of like getting free money and is a highly sought-after benefit. 

What to consider before signing up

Before signing up for an employer-sponsored retirement plan, you’ll want to find out whether your current employer has them available or if you need to find a new job.

Related: How to find a financial planner

How to use an employer-sponsored retirement plan

Once you’ve settled on a retirement plan, it’s important to start contributing — as much as possible. Many employers offer matching contributions, and if they do, it often makes sense to contribute to that account first. That way, you’ll get the full matching contribution. You may also want to consider using automatic deductions from your paycheck so that you don’t forget to save money for retirement.

Why should you take advantage of a company-sponsored retirement plan?

There are several reasons why you should consider using an employer-sponsored retirement plan. 

Related: Retirement planning calculators you need to try

1. An excellent way to save

Employer-sponsored retirement plans are a great way to save for retirement. Employees can contribute money to these accounts on a pre-tax or post-tax basis (Roth versions).  Each offers different tax advantages. 

Additionally, many employer-sponsored retirement plans offer matching contributions from the employer. This means that the employer will match any contributions to your account up to a certain amount. This is free money and can help you save even more for retirement.

2. Easy to use

Employer-sponsored retirement plans are easy to use. Many employers will automatically enroll employees in their plan unless they are opt-out. This makes it easy for employees to start saving for retirement without worrying about setting up a new account or making contributions on their own.

3. Consolidates your retirement savings

Employer-sponsored retirement plans are a great way to consolidate your retirement savings. For example, you can often roll over your old 401(k) account into the new company plan. This eliminates the need to manage several accounts and makes it simple to keep track of all your retirement funds in one spot.

4. Tax benefits

You can also get tax advantages from the retirement plans. For example, many employers offer 401(k) plans, and the pre-tax money you put into it means you will pay less in taxes each year you contribute. However, some employers also offer a Roth version of the 401(k) as well. Roth 401(k) accounts get funded with after-tax money, and, as the investments in the account grow, withdrawals become tax-free at age 59½.

Related: Traditional IRAs & Roth IRAs: What’s the difference?

5. Convenience

You need to worry about the day-to-day trading or maintenance of the investment. The employee will usually choose from a number of investment options, and a portfolio manager will manage the investments on their behalf. This takes the guesswork out of saving for retirement and makes it easy for employees to stay on track with their savings goals.

6. Matching contributions

Many employer-sponsored retirement plans offer matching contributions from the employer. This means that the employer will match any contributions to your account up to a certain amount. 

For example, let’s say your employer matches 50% of your contributions. In this case, they will contribute an equal amount to your account for every dollar you put in — usually up to a certain amount, such as 5-6% of your salary. This is a great way to boost your savings and can help you save even more for retirement. 

Related: Planning for retirement: How to get started

What if you are self-employed?

Those who are self-employed also have some options, including a Solo 401(k). To qualify for a Solo 401(k), you can’t have any employees aside from your spouse. However, if your spouse works with you, both of you can make contributions, which increases the total amount you’re able to put away. “My wife started working with me as a part-time employee last year, and now we’re able to increase the combined amount we’re allowed to contribute each year,” says Marc Andre, business owner at Vital Dollar.  

“You can also make Roth contributions to a Solo 401(k), which won’t reduce your taxes today but may reduce your taxes in retirement,” adds Andre. Indeed, there are some specific rules related to eligibility and contributions, so it’s a good idea to speak to a tax professional or retirement plan specialist to be sure that a Solo 401(k) is a good fit. 

Final thoughts

Employer-sponsored retirement plans are a great way for employees to save money for retirement. They offer a variety of options and benefits, including tax-advantaged savings, employer matching contributions, and convenience. Besides that, these plans often come with a plethora of options making it likely that you will be able to find one that suits your needs. The only question then is, When it is the right time for you?


This article was produced and syndicated by MediaFeed.org.