Saving towards retirement is one of the best things you can do for yourself. An employer-sponsored retirement plan is one of the benefits employers offer to their employees. Such methods help employees prepare better towards a financially-independent retirement—a writer at Green Sprout shares in the interview below how to maximize your employer-sponsored retirement plan.
What Are The Available Employer-Sponsored Retirement Plans?
There are two kinds of employer-sponsored retirement plans. At Green Sprout, we recommend the 401(k) and 403(b) retirement plans.
What Is The Difference Between The 401(k) And The 403(b) Retirement Plans?
Although they are pretty similar, the difference between the two plans is that profit-making employers sponsor the 401(k) plan. At the same time, the 403(b) retirement plan is sponsored by the government or nonprofit organizations.
What Are The Benefits Of An Employer-Sponsored Retirement Plan?
One benefit of a 401(k) retirement plan is that contributions are made before taxes, reducing your taxable income. Thus, helping you save more. The 401(k) plan also allows you to make a higher contribution than an Individual Retirement Account (IRA).
Another significant benefit of the 401(k) plan is that employers can contribute matching funds to encourage your savings.
How Can You Maximize An Employer-Sponsored Retirement Plan?
The first step to maximizing your retirement plan is to understand it fully. You can clarify with your employer’s benefits officer, and if you still have doubts or questions, you can talk to a tax advisor or financial planner. You can also research and read available resources.
Another way our experts at Green Sprout recommend in order to maximize the benefits of an employer-sponsored retirement plan is to contribute as much as possible. The account has a higher limit for contributions compared to Traditional and IRAs.
Because the contributions are made before taxation, your taxable income for the year is much lower if you maximize your contributory capacity. Also, since you will have accumulated a lot of money over time, you can benefit from compound interest, which earns you a higher claim on your savings.
In What Other Ways Can You Maximize An Employer-Sponsored Retirement Plan
Another way to maximize your employer-sponsored retirement plan is to take advantage of your employer’s match. Matching contributions vary per employer. However, identifying and maximizing the matching percentage will help you reach your saving goals faster.
It is also essential that you get vested. Different employers are different policies on vesting periods. You will lose your employer’s matching contributions if you change your job or leave the company before the vesting period ends. Thus, it is essential to consider that before taking on new employment.
Lastly, you need to be patient when it comes to withdrawal. Don’t rush to withdraw your savings from your retirement account. This can cause you to face high withdrawal charges and lose out on more compound interest.
Can I Have An Employer-Sponsored Retirement Plan If I’m Self-Employed?
You can open a Solo 401(k) account for a self-employed individual. This account is similar to an employer-sponsored account, but the only difference is that you act as the employer and employee. You also get to control the performance more than with an employer.