Employer-sponsored retirement plans like 401(k)s and 403(b)s are powerful workplace benefits that allow you to save for the future while lowering taxable income. Optimizing these plans is vital for building your nest egg. This blog will provide tips to maximize your employer’s retirement plan.
Overview of Employer-Sponsored Retirement Plans
Employer-sponsored retirement plans refer to tax-advantaged accounts like 401(k)s, 403(b)s, and 457(b)s that companies provide to employees as a benefit.
Key features include:
- Make pre-tax or Roth after-tax contributions through payroll deductions
- An employer may match a percentage of your contributions
- Funds grow tax-deferred, boosting returns
- Qualified withdrawals in retirement are taxed as income
- Typically self-directed investing from a menu of investment options
- Ability to borrow or take hardship withdrawals under certain conditions
Given the tax perks and potential employer matching, fully utilizing these plans can greatly accelerate your retirement savings.
Key Benefits of Employer-Sponsored Retirement Plan
The main benefits of participating in an employer’s retirement plan include:
- Tax savings – Pre-tax contributions reduce current-year taxable income.
- Tax-deferred growth – Investment earnings grow tax-free over time, increasing compounding.
- Employer match – Many employers will match a percentage of your contributions up to set limits. This is free money.
- Payroll deductions – Contributions conveniently come directly out of your paycheck.
- Portability – You can roll over balances to a future employer’s plan or IRA when changing jobs.
- Accessibility – Loans or hardship withdrawals are allowed under certain circumstances.
- Oversight – Employers select and monitor investment options for the plan.
Now let’s discuss tips to maximize these workplace plans.
How to Maximize Your Employer’s Retirement Plan
1. Take Full Advantage of Matching Contributions
If your employer offers matching contributions, strive to contribute enough to get the full match. This provides an immediate 100% return on those contributions.
2. Increase Contribution Rate Gradually Over Time
Bump up your contribution rate by 1-2% yearly to continually boost savings while keeping pace with income growth.
3. Contribute at least 10% of Income Including Match
Experts recommend total retirement contributions of 10-15% annually. If your employer matches 6%, contribute at least 4% yourself.
4. Use Catch-Up Provisions if Age 50+
Those 50 and over can make catch-up contributions above annual limits, currently an additional $6,500 for 401(k) plans. Use this if able.
5. Max Out Annual Contribution Limits
Try your best to reach federal annual contribution limits, which are $20,500 for 401(k)s in 2022, plus any catch-up amounts.
6. Enroll Early to Maximize Compounding
Enrollment is often allowed after just a few months on the job. Sign up right away to benefit from decades of tax-deferred growth.
7. Review the Investment Menu and Allocate Accordingly
Choose a diversified mix of stocks, bonds, and other assets based on time horizon, risk tolerance, and expenses.
8. Rebalance Regularly to Maintain Target Asset Allocation
Periodically rebalance your holdings to keep your desired asset allocation since market shifts will skew allocations over time.
9. Avoid Borrowing or Withdrawing Funds
Try your best to avoid tapping retirement plan funds before retirement, as permanent withdrawals decrease your balance.
Following these tips will go a long way to getting the most from your employer’s plan and securing your retirement.
Other Retirement Accounts to Consider
While maximizing your workplace retirement plan is crucial, also consider opening these supplemental plans:
- Traditional or Roth IRA – Contribute up to annual limits to an individual retirement account for added savings.
- Health Savings Account – If enrolled in a high deductible health plan, contribute to an HSA which offers triple tax benefits.
- Individual brokerage account – Open a taxable account to invest beyond retirement plan limits and diversify tax exposure.
Use all available options to save and invest for the future.
Employer-sponsored retirement plans offer unmatched convenience and tax incentives making them a cornerstone of your nest egg. Contributing enough to capture any matching funds, increasing your rate periodically, using catch-up provisions, maximizing annual limits, enrolling early, and investing appropriately will lead to robust returns over time. Paired with sound financial habits and supplemental retirement accounts, optimizing your workplace plan puts retirement security well within reach.
FAQs About Employer-Sponsored Retirement Plan
What are the main types of employer retirement plans?
The most common plans are 401(k), 403(b), and 457(b) accounts. Many non-profits offer 403(b) plans while government entities offer 457(b)s. 401(k) plans are used by most businesses.
What is the maximum I can contribute annually to a 401(k)?
For 2022, the contribution limit is $20,500. Those 50 or older can contribute an extra $6,500 as a catch-up amount. Overall limits for 401(k), 403(b), and 457(b) plans are the same.
How much should I save in retirement accounts per year?
Saving 10-15% of your gross annual income for retirement is a good goal. This includes your own contributions plus any matching amounts from an employer. Maximizing workplace plans makes hitting this target easier.
How often should I review my plan investments?
Aim to review your account holdings, performance, fees, and asset allocation at least every six months. Revisit your risk tolerance and time horizon as well to make any adjustments to your investment mix.
Can I roll over my employer retirement account if I change jobs?
Yes, you can roll over your balance to a new employer’s plan, or to an IRA. This preserves the tax-deferred status of the funds. Make direct rollovers to avoid any taxes or penalties.