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Tips for Taking Advantage of Employer Savings Plans

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By Paula Pant, WiserAdvisor contributor

Trying to save more, but not sure how?

Employer savings plans are a great way to add to your retirement fund or savings goals. If your employer offers one and you're not taking advantage of it, you should be. Here's a quick guide to get you started.

The Benefits of Employer Savings Plans

Before we discuss how to get started, let's first review why.

Your employer may offer multiple types of savings plans -- some of which are based around retirement, and some of which are for general funds. If you've always meant to put some money aside but have never gotten around to it, these plans are a great way to start saving. Your contributions to an employer-sponsored savings plan are automatically deducted from your paycheck, you won't be tempted to spend it on something else and you most likely won't even miss it -- it's out of sight, out of mind.

You can also enjoy some nice tax breaks for participating in an employer-sponsored retirement savings plan, such as a 401k, 403b, or IRA. Your contributions are made pre-tax, meaning they're taken from your salary before any income tax is withheld, and your total taxable income for the year will be lower. Your investments will also grow tax-deferred, meaning you won't have to pay any taxes on the funds until you actually withdraw them.

Sound like a good deal? Then let's get started!

Know How Your Plan Works

To take full advantage of an employer-sponsored savings or retirement plan, you want to make sure you understand the basics of how it works. Read over all of the information your employer provides about the plan, and if you have questions, set up a time to talk with HR or your company's benefits department. You may also want to discuss the documents with your financial planner to determine how the plan fits into your overall financial strategy.

Plans differ from company to company, but some basic features you can expect to find include:

  • Your money will be automatically deducted from your paycheck.
  • You decide how much is deducted (up to maximum annual contribution levels). You can change this amount at certain times throughout the year (often quarterly).
  • Many companies offer employer matching, where they will contribute an amount equal to your contribution up to a certain level.
  • You may be able to borrow against your account balance or withdraw funds early, although this may be subject to certain taxes and penalty fees.
  • Your company policy may require that you work there for a certain period of time before you are eligible to contribute.

Maximizing Your Savings

To get the most from your employer-sponsored savings or retirement plan, you want to contribute the highest amount you are able to (and allowed to based on plan limits) -- especially if your employer is matching your contributions.

Remember, every dollar you put into these accounts will enjoy tax-deferred growth, compounding your investment year after year. At the very minimum, you want to at least pay up to the highest amount your employer will match.

You also want to choose your investments wisely. Research your options so you know how various funds are performing, how much risk they involve and how well suited they are for your specific retirement goals.

Again, a financial advisor can help you here if you don't feel comfortable making these decisions on your own. Re-examine your investments on a regular basis and make changes as needed to make sure you're getting the best returns you possibly can.

When You Leave

There's a good chance you might not stay with your current employer forever, but the good news is that you can take your funds with you. Know your options when it comes to taking a lump-sum distribution, letting your funds continue to grow tax-deferred in your account or rolling your funds over to a new account if your new employer allows it.

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