By participating in your employer-sponsored retirement plan, you save and ensure sufficient income for your retirement. However, many employees choose not to sign up and may be unaware of the benefits of these plans. We found three advantages of making salary-deferral contributions to employer-sponsored plans, such as 401(k)s and 403(b)s.

1. Reduce Your Taxable Income

Contributions to your employer-sponsored plan are commonly 澳洲幸运5官方开奖结果体彩网:tax-deferred, where your annual taxable income is reduced by the amount you contribute. However, distributions at retirement are taxed, but you'll likely be in a lower 澳洲幸运5官方开奖结果体彩网:tax bracket as a retiree.

If your tax 澳洲幸运5官方开奖结果体彩网:filing status is "single," your taxable income for the year is $31,000, and you contribute $2,000 to your 401(k) account, your taxable income will be reduced to $29,000. For 2024, the annual individual contribution limit, set by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS), to a 401(k) plan is $23,000. If you are 50 or older, you can make an additional 澳洲幸运5官方开奖结果体彩网:catch-up contribution of $7,500.

2. Earn Tax-Deferred Growth

When saving with a tax-deferred retirement plan, investment earnings are also tax-deferred. You will not pay taxes on your interest or gains over the years, regardless of their value, until you withdraw from the plan at retirement.

3. Earn "Free Money"

Many employers include matching-contribution provisions in their company plans. If you do not participate and are not making salary-deferral contributions, you lose the benefits offered by your employer. Consider contributing up to the maximum amount your employer will match, or you may miss out on "free money." The matching funds also accrue earnings on a tax-deferred basis and are not taxed until you withdraw the amount from your retirement account.

401(k) Savings Example

John works for ABC Company, with a matching contribution of 50 cents on every dollar, up to a sum equal to 6% of each employee's compensation. John's compensation is $31,000, and 6% is $1,860.

If John contributes $2,000 from his pay♐checks throughout the year, John will receive an additional $1,000 contribution to his 401(k) account from ABC Company (50% of $2,000). If John wants to receive the maximum 6% of his compensation ($1,860) that ABC would contribute to his 401(k) account, John must contribute $3,720 per year.

Many employer plans require an employee to complete a certain number of years or vesting before the employer contributes matching funds to a 401(k).

Distributions and Withdrawals

When you retire, consider other income sources, such as 澳洲幸运5官方开奖结果体彩网:Social Security, when deciding how much you want to withdraw from your retirement savings. Your total income will determine your ov♛erall tax rate for that year.

To withdraw from a 澳洲幸运5官方开奖结果体彩网:qualified plan, a participant must be over age 59½ to begin withdrawing distributions from a 401(k). If a distribution is taken before the age of 59½, there will be penalties, including a 10% tax by the IRS on the amount distributed. Also, the distribution will count as taxable income, meaning it'll be taxed at the employee's 澳洲幸运5官方开奖结果体彩网:marginal tax rate or income tax rate.

After age 73, you must begin distributing funds annually from a 401(k) as 澳洲幸运5官方开奖结果体彩网:required minimum distributions (RMD💫s). The amount of the RMD is calculated by the IRS, based in part on your total retirement savings.

Adding IRAs to Your Retirement Plan

There are many benefits to making salary-deferral contributions to your employer-sponsored plan. If your employer does not offer a plan with such a feature, consider funding an 澳洲幸运5官方开奖结果体彩网:individual retirement plan (IRA) instead.

An IRA doesn't have an employer-matching benefit, but you receive a tax deduction in the years you contribute money. Also, any earnings grow tax-free, and you're not taxed on the money until you withdraw it in retirement. Contribution limits are lower for IRAs versus 401(k)s. For 2024, it's $7,000, and those over 50 can contribute an extra $1,000 as a catch-up contribution.

If you have the option and can afford it, contribute to both an IRA and your employer-sponsored plan. Contributing to your 澳洲幸运5官方开奖结果体彩网:retirement plan helps ensure a financially secure retirement.♋ As always, consult with your tax professional for as🍌sistance in making decisions on financial matters.

The Bottom Line

Employer-sponsored retirement plans are a way to save for retirement and come with many benefits. The plans reduce your taxable income, investments grow tax-deferred, and you can get "free money" through employer matching contributions.