Retirement savings plans such as 401(k), 403(b) and government 457 accounts can greatly impact employee’s finances. Here are three reasons why you should participate and maximize your employer match.
Contributions to 401(k) plan and earnings in these accounts are made with pre-tax dollars, reducing taxable income for the year. This can provide important long-term tax benefits.
Tax-Deferred Savings
When you contribute funds to your 401(k), they are invested on a pre-tax basis, and any earnings they earn also grow tax-deferred. The money is taxed once you withdraw it during retirement, which is usually taxable at ordinary income rates.
Many employers incentivize workers to participate by matching a percentage of their contributions up to a limit. And people 50 and older can add extra “catch-up” contributions of up to $10,000 annually (indexed annually for inflation).
You can use tax-deferred savings by opening your retirement account if you’re self-employed. A SEP IRA is a great option for small business owners and freelancers who want to cut their tax bills by investing in long-term assets.
Tax-deferred savings help you get more out of your investments through the magic of compounding. Each new investment yields more and more, so if you keep adding to your account over time, you’ll have a lot more cash to use in retirement.
In the future, most Americans will likely be earning less during their retirement years as they downsize and rely more on pensions and Social Security for income. That’s good news for 401(k) savers since lower earnings mean lower tax bills.
Tax-Free Earnings
One of the 401k retirement plan benefits allows employees to save money pre-tax. That means the amount of money contributed to a 401(k) plan is taken from the worker’s paycheck before federal and state income taxes are withheld. This can significantly lower a worker’s tax liability for that year.
The savings that are invested can earn tax-deferred earnings for years. The tax treatment of 401(k) contributions can be especially beneficial for workers who expect to be in a higher tax bracket when they retire than they are now.
In addition, many employers offer a matching contribution to their employee’s 401(k) accounts. This is an excellent way for companies to incentivize their employees to save for retirement and can help boost their savings rates.
Small business owners may also consider offering a SEP IRA retirement plan. SEP IRAs are similar to traditional 401(k)s but offer a few unique features that can benefit small business owners.
Those who participate in a SEP IRA can roll over the funds they withdraw from their plan to another retirement account without paying taxes or penalties. This can be useful for workers who change jobs and give them access to a wider selection of investment options than they would have had at their old employer’s plan. However, it’s important to remember that the government does not guarantee or insure IRA funds.
Tax-Free Distributions
The 401(k) retirement plan allows employees to withdraw money from their accounts, without tax penalties, after a certain age. This feature can make it easier for older workers to meet their financial goals during retirement by making it more affordable for them to pay for things like healthcare and living expenses.
Employers typically encourage participation in their 401(k) plans by matching employee contributions. While this may seem like a small incentive, it can be a huge difference in encouraging younger workers and lower waged employees to participate. In addition, it can help offset the costs associated with recruiting, interviewing, and training new hires.
Many employers also provide profit-sharing features in their 401(k) plans. This is a great way for small businesses to share their profits with their employees in an effective manner.
Business owners must take advantage of the 401(k) retirement plan benefits they can offer themselves and their employees. It can be a great tool to reduce their taxable income, grow their retirement savings, and even manage the future of their companies.
Small business owners can benefit from a 401(k) plan in many ways, and they must understand the impact these plans can have on their bottom line. By saving early and being consistent with their contributions, they can build up a large nest egg to help them have a comfortable retirement.
Employer Match
An employer match is a free money added to an employee’s retirement savings plan. It can be up to a percentage of an employee’s salary, and the maximum contribution limit is currently $27,000 (or $57,000 for those aged 50 or over). Regardless of the match type, employees should always aim to contribute enough to get the full employer match.
The employer match is a powerful incentive to boost employee savings drastically. If an employee can save enough to receive the full employer match, they will have a nest egg of over $84,000 by retirement (assuming no increase in investment returns).
A matching contribution also helps businesses retain top talent by encouraging employees to stay with the company until retirement. This can be especially important given how many skilled, valuable employees scout the job market for new opportunities with competing companies with better benefits packages.
Adding an auto-enrollment feature to your 401(k) or 403(b) plan can make it easier for workers to take advantage of the opportunity. By automatically enrolling all eligible employees in the plan at a pre-determined savings rate and default investment selection, you can make it more likely that your workers will participate and maximize their contributions. Your adviser can help you set up an auto-enrollment program for your business.
