Choosing A Retirement Solution

Your Employer's Retirement Plan

For both employers and employees, an employer-sponsored retirement plan should be the cornerstone of your retirement savings strategy.

If you have access to a retirement plan and your plan allows you to contribute to your account, you will probably want to take advantage of that important benefit. Contributing to your retirement plan will allow you to defer from taxes a portion of your current income and allow your retirement account to grow even more through the power of compounding.

For most of us, the retirement plans available to us are defined contribution plans, allowing both the employer and employee to contribute.

With defined contribution plans — such as profit sharing plans, SEP-IRAs, SIMPLE-IRAs, 401(k) plans, Safe Harbor 401(k) plans, Automatic Enrollment Safe Harbor 401(k) plans , and 403(b) plans — the amount you have available to you at retirement depends on how long you participate in the plan, how much you contribute, the amount of your employer's contributions, and how well your investments perform over the years.

The biggest advantage of investing in a plan for many people is the significant tax breaks an employer-sponsored retirement plan offers. The money you invest in a plan and the earnings on those contributions are deferred from income taxes until you withdraw the money. Since your earnings may well be lower when that day comes, you could experience an overall tax savings.

Tax deferment also means that contributing to your plan may not decrease your take-home pay as much as you might think. For example, if you put $100 into a retirement plan each month and your income tax rate is 15%, because of your tax deferment, your take home pay is only decreased to $85.

Just as important, many plans give the employer the opportunity to contribute to the retirement nest eggs of their employees. And, though with some plans the money an employer contributes may not be available to employees immediately, your nest egg continues to grow through compounding. The money you contribute is generally available to you, although penalties may apply if you withdraw any funds before you retire.

How do you make the most of your employer-sponsored retirement plan?

  • Join as soon as you become eligible.
  • Put in the maximum amount allowed so you can make the most of any employer matching contributions.
  • Make informed decisions on the investment choices available to you.
  • If your employer matches your contributions with stocks instead of cash, financial experts recommend that you don't let your account get overloaded with company stock.

If your employer doesn't currently offer a retirement plan — or if you are an employer who wants to know more — there are many business advantages that establishing a plan provides. To help all employers understand more about the benefits, the U.S. Department of Labor and the AICPA have created this informative Choosing a Retirement Solution website for you. You'll also find helpful information for employers in the resources section of this site.

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