Ten Things to Know About Your Employer’s Retirement Plan
- What it is?
- Your employer’s retirement plan is a defined contribution plan designed to help you finance your retirement. Federal and sometimes state taxes on your contributions and investment earnings are deferred until you receive a distribution from the plan (typically at retirement).
- Why do they call it a 401(k)?
- The 401(k) plan was born over 40 years ago, under Section 401(k) of the Internal Revenue Code, hence, 401(k).
- You decide
- You decide how much to contribute and how to allocate your investments. This gives you the advantages of easy diversification – a well balanced mix of investment choices, and dollar-cost averaging by making regular investments over time.
- It’s easy
- You contribute your pre-tax dollars and lower your taxable income by making automatic payroll deductions. It’s a simple method of disciplined saving!
- Know your limits
- In 2022 you can save up to $20,500 of your pre-tax dollars. If you are age 50 or older, you can save an additional $6,500.
- Incentives
- It’s tax-deferred to contribute to your retirement plan! Also, many employers will match some of your contributions. This is FREE money and a great incentive to contribute to your plan. Does your company offer early retirement incentives (ERI)? Check with your Human Resources department!
- Vesting
- Should your employer make a matching contribution; vesting refers to the percent of your employer contributions that you have the right to take with you when you leave the company.
- Borrowing
- Some plans allow you to borrow a percentage of your account value. Keep in mind that you have to make regular payments plus interest on the loan.
- Early withdrawals
- You may be able to take a distribution before you retire, for instance for certain emergencies (hardships). Understand that it may have a 10% early penalty in terms of Federal and/or state income taxes. While this may be good for emergency situations, your retirement plan is a retirement savings fund, not meant to be a rainy-day fund!
- Leaving the company
- When you leave your job, you can rollover your retirement plan savings to either an individual retirement account or a new employer’s retirement plan.
