Investing through employer sponsored retirement plans

The easiest way to start investing is through an employer sponsored retirement plan, such as a 401(k) plan. Learn how you can take advantage of all the benefits that popular tax-deferred retirement plans have to offer.

What is an employer-sponsored retirement plan?

An employer-sponsored retirement plan is a type of workplace benefit that offers employees an automatic way to save for retirement. A portion of each paycheck goes to a specific savings plan, such as a 401(k), 403(b) or SIMPLE IRA.

You can decide how much you’d like to contribute toward your plan each pay period; some employers even match contributions up to a certain amount. If needed, you can typically change how much you’d like to contribute at certain points throughout the year while staying within the maximum contribution amount.

Employer sponsored retirement plan types

Employer-sponsored retirement plans can take several forms. The two most common are 401(k) and 403(b) plans; options are also available for self-employed individuals and small business owners.

Employer 401(k)

With employer-sponsored 401(k) plans, you choose a percentage of your paycheck to be paid directly into an investment account. You can typically choose from a number of different investment options or opt to have your investments selected for you if a managed account option is made available. There are two main types of 401(k) plans: a traditional 401(k) and a Roth 401(k), which have different tax stipulations, outlined below.

403(b) employer plans

These plans (also known as TSAs or “tax sheltered annuity” plans) are retirement plans usually offered by tax-exempt organizations like churches, charities, schools and universities. While they function similarly to 401(k) plans, there are a few differences. For example, 403(b) plans may have fewer investment options than 401(k) plans, and it is less common for employers at these organizations to offer contribution matching.

Solo 401(k)s, SIMPLE IRAs, and SEP IRAs

If you’re self-employed or own a small business, additional retirement plan options are available to you. Each have different rules and regulations.

These options include solo 401(k)s, SIMPLE IRAs and SEP IRAs.

• Solo 401(k): A solo 401(k) functions similarly to a multiple employee 401(k) but is reserved for self-employed individuals with no employees. You can create a solo 401(k) for yourself and even include a spouse, who also works in the business, to maximize your contribution potential. As an owner only business, you have the ability to contribute as both the employee and the employer to reach higher levels of tax deductible contributions pursuant to overall IRS contribution limits.
• SIMPLE IRAs: A SIMPLE (Savings Incentive Match Plan for Employees) IRA is available for self-employed individuals or small business owners with fewer than 100 employees. If you adopt this plan as an employer, you’ll need to make mandatory contributions to eligible employee accounts. Contribution limits are slightly less than the 401(k) plan option.
• SEP IRAs: A SEP (Simplified Employee Pension) IRA is a good fit if you have few or no employees and aren’t sure how much you can contribute each year. SEP IRAs are funded solely from employer contributions and capped at 25% of net taxable income. Since these contributions are tax deductible, they can help reduce your taxable income.

Read more about contribution limits and rules for these retirement plans.

Benefits of retirement investing through your employer

Saving for retirement throughout your career is necessary for financial peace of mind, and investing through your employer can make it even easier to check it off your list. Here are several key benefits of employer-sponsored retirement plans:

• Tax advantages. If you’re contributing to a traditional 401(k) plan, you are contributing “pre-tax dollars.” This means that your money goes directly from your paycheck into the plan without being taxed, reducing your tax bill for the year. Plus, your earnings can grow on a tax-deferred basis, which allows your savings to build more quickly.

With Roth 401(k)s, your contributions are made on an “after-tax” basis. This means that your contributions are taxed before going into your plan, so withdrawals in retirement are tax free (provided all required criteria are met). This plan can be especially smart if you expect to end your career in a higher tax bracket than you were in when you contributed to your Roth 401(k).

• Employer contributions. Some employers offer a company match of your 401(k) contributions up to a certain amount, meaning you essentially earn free money by investing in your own retirement.
• Automatic contributions. The fact that you can have money flow directly from your paycheck into your retirement account provides you with the convenience of automatic savings.  Many people find this “set it and forget it” strategy helpful for ensuring money is set aside for retirement instead of being available to spend on something else.

Boosting your workplace retirement savings

Making the most of your employer-sponsored retirement plan can help you work toward the retirement lifestyle you desire. Though these plans are fairly straightforward, there are some smart ways to boost your employer retirement plan through matching contributions and investment opportunities.

As mentioned above, certain employers may offer a matching contribution to your plan. This means for every dollar you contribute, up to a certain amount or percentage, your employer will match that contribution. Review your employer’s policies to make sure you’re taking full advantage of the matching contribution—it can be an incredible opportunity to watch your retirement savings add up.

Select companies may also offer an employee stock ownership plan (ESOP). Make sure to evaluate your investment options so they align with your risk tolerance and long-term goals.

An employer-sponsored retirement plan can serve as a cornerstone of your retirement savings strategy, benefiting your financial future while bringing you peace of mind with every paycheck. Consider participating in your company’s retirement plan options if you aren’t already—or increasing your contributions to ensure you’re one step closer to the retirement lifestyle you want.

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