Blog Post: Should You Contribute To Your Employer-Sponsored Retirement Plan?

Whether you are 21 or 50, you may have asked yourself how beneficial is it to invest in the 401-K plan or other retirement plan at your employer. You should ask a financial planner about what the invest in, but whether to invest is usually YES. It is especially yes if your employer matches your contribution.

There are many employees missing out on the benefits. Younger people in their 20s often don't understand the value of retirement planning and make the mistake of neglecting their 401-K plan. If your employer matches your contribution, the mistake is even bigger. For example, if your employer offers a 50 percent match of up to 5 percent of your salary, you'd be passing up on an instant return on your money. It's free money. People usually say nothing in the world is free, but this is.

Keep in mind that many employers require you to work at the company a specific number of years (e.g. 5 years) to be vested (i.e. have full ownership of the matching funds). This may deter some people if they don't feel they will stay at the employer that long. Don't forget that your contribution to the plan is always yours. Also, the contribution is tax-deferred and lowers your tax burden within the year you make the contribution. In other words, it lowers your taxable income, which lowers your tax obligation to the IRS during that year.

As with any tax benefits, there are guidelines, such as maximum contributions. If your employer offers an employer-sponsored retirement plan, ask them what they require, such as tenure, status (e.g. exempt versus non-exempt) and investment alternatives (e.g. mutual funds). Also, contact your financial planner to discuss the investment options your employer provides or a tax advisor to discuss tax benefits.

As you consider new employment, do yourself a favor and ask whether the company has a 401-K plan. If they have a 401-K plan and match a percentage of your contribution, you can consider this extra compensation beyond regular salary.  For example, if you make $50,000 and your company matches 50 percent (up to 6% of your contribution), you can make an extra $1,500 in annual income.  On top of that, your taxable income can be decreased by $3,000, which can save on taxes.  That's not a bad deal.  And as a bonus, you have retirement savings.  Retirement savings alone is a great motivator, but the other benefits make the deal even sweeter. 

A. L. BEAN & Company

Consulting, Tax & Accounting

www.albeanco.com