Employer retirement plans are an essential part of retirement in today's world where many companies no longer offer a traditional pension. Here is some insight into the basics of employer retirement plans.
Joshua P. Mersberger, CFP®, CRPC
May. 4th, 2016
Most employees today have access to an employer-sponsored retirement plan of some sort, whether that be a 401(k), 403(b), or some other employer-sponsored retirement plan. Many companies also offer a matching contribution to those retirement plans to encourage their employees to save. The matching contribution often takes the form of a dollar for dollar match. For example, a company may match up to 4% of an employee's contribution and nothing after that 4% threshold. Mersberger Financial Group encourages our clients to contribute at least up to the maximum amount matched by their employer in order to maximize the dollars that are contributed to their retirement. Employer matches are a great way to increase the amount that you are saving, but unfortunately many times employees fail to take full advantage of this important benefit.
Traditional 401(k) vs Roth 401(k)
Many 401(k) plans offer employees the choice of contributing to a traditional 401(k) or a Roth 401(k).
In the traditional 401(k), employee contributions are made pre-tax and employees realize a tax deduction up to the amount that they contribute for that year's taxes. The money contributed grows tax-free and then taxes are paid at their applicable tax rate when the money is withdrawn.
When employees contribute to a Roth 401(k), the money is contributed after-tax and employees do not realize tax savings. The money again grows tax-deferred, but withdrawals of both interest and principal are tax-free if taken as a qualified withdrawal. A qualified withdrawal is a withdrawal taken after the account has been in effect 5 years and one of the following events has occurred; death, disability, or age 59 1/2.
Depending on your individual situation, one of these options may make more sense than the other.
How to Invest Your Contributions
When employees make contributions to their 401(k), it is up to the employee to decide how the contributions should be invested. Most retirement plans will offer access to guidance and education on investment selection and asset allocation, but the final decision is still ultimately up to the employee. Mersberger Financial Group often sees clients whose 401(k) accounts are invested more aggressive than the employee intended which can lead to confusion about performance. We encourage employees to take advantage of the educational opportunities that are provided by their employer and plan provider, as well as reviewing your current asset allocation with any financial professionals that you may be working with.
Please contact our office if you have any questions regarding this topic.
This piece is not intended to provide specific legal or tax advice. For specific professional assistance, the services of an appropriate professional should be sought.
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