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Why Should I Invest in My Employer’s Retirement Plan?

Why Should I Invest in My Employer’s Retirement Plan?

Planning and saving for your retirement are essential, whether you want to continue to work past retirement age or retire early. One of the easiest ways to begin saving for retirement is to contribute to your employer’s retirement plan. If you have not taken advantage of this opportunity, here are some reasons you should:

Tax-Deferred Status

Money you contribute into a qualified retirement plan is not considered part of your taxable income. The money is allowed to grow, tax-free, until the time you begin taking distributions. To preserve the tax-deferred status, you may not take withdrawals from your account until you reach 59.5. Early withdrawals are penalized by federal tax law, and the money will be considered part of your taxable income for state and federal tax purposes.

Payroll Pre-Tax Deductions

The contributions you make to the qualified retirement plan are generally taken from your paycheck before taxes are taken. This is beneficial for several reasons. First, the amount of your contribution may not lower the entire amount of your take-home pay as much as you might think. There are calculators available that will show you the difference in your take-home pay, depending on the amount of pre-tax dollars you contribute to your retirement. Second, your contributions are automatically taken from your pay each pay period, meaning you have to do nothing other than select your election amount. Third, your contribution will lower the overall amount of your taxable income, meaning there will be less money subject to state and federal taxes each pay period.

Employer Matches

Most employers offer to match his or her employees’ contributions to their retirement plans, up to a certain percentage. Employers receive nice tax incentives for their generosity and you receive a boost to your retirement savings, sometimes up to as much as 5%. If you can do so, you should contribute at least up to the amount of your employer’s match to maximize your retirement savings.

Social Security Will Not Be Enough

Many Americans are relying on Social Security benefits to take care of them during retirement and are discovering the monthly amounts are not financially enough to cover all their needs. While estimates vary widely, depending on the source, you will need anywhere between 60%-100% of your current income to retire, depending on the type of lifestyle you want to maintain. This could mean you will need to save enough money to live on for 30 or more years. This is why it is important to begin saving early and to take every opportunity available to add to your retirement savings.

Participating in your employer’s retirement plan should be the starting point for building your retirement savings. Depending on your financial situation and retirement goals, you also may want to invest in IRAs, Roth IRAs and other vehicles to maximize your savings.

Copyright © 2008 FindLaw, a Thomson Reuters business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

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