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Income - Head Matters


3. Employer Savings Plan

If you’re like most people and have a hard time saving, especially saving for retirement, a great option is to have your employer take money out of your paycheck for you to contribute to your savings account at work.  Often the employer will even provide a match to your contributions. In addition to making it easier to save money, with many retirement savings vehicles, the money is taken out of your pay check before your earnings are taxed, which means that you are paying tax on a smaller amount and therefore are paying less taxes. These retirement plans incent people to keep the savings in the retirement plan instead of spending it on something else because, if the money is withdrawn from the plan before the person is 59 ½ years old, they are required to pay tax on the money and pay a penalty for early withdrawal.

Tax advantaged plans
If you are eligible for a tax-deferred (or tax-sheltered) plan, you can gain even more.  The federal government allows tax deductions for many types of savings plans.  Some plan options carry the number of the line in the tax code that describes them, like 401(k), 403(b) and 457.  One savings plan option has the generic name of Individual Retirement Account (IRA).  There are three types of IRAs – Traditional, Roth, and Education.  There are also special retirement options for individuals who are self-employed – Simple and SEP.

The differences among these investment options can be confusing, but they do have several features in common.  They are tax-deferred, retirement savings plans that provide a federal tax deduction, tax-deferral of contributions and earnings, and, in some cases, employer matches.  The largest financial benefit is that the contributions and earnings are tax-deferred.  This means that taxes due on the amount invested and/or its earnings are postponed until funds are withdrawn by you to use usually at retirement.  Simply put, you don’t pay tax on your contributions before they go into savings and you do not pay taxes on the earnings of these contributions until you retire.

Choosing the plan that’s right for you
When shopping for the plan that’s right for you, your choices will be first limited by the employer for whom you work.  After that you will be faced with plans that vary on some standard features.  Knowing these features will assist you in narrowing down your choices.  Here’s a list of how plans may vary:

  1. Who is eligible to contribute?
  2. What is the maximum annual contribution?
  3. Are the contributions taxable?
  4. Are the earnings taxable?
  5. What types of limitations are on investments?
  6. When you can withdraw funds and are there penalties on withdrawals?
  7. Is there a required time for withdrawals?
  8. Do you manage your investments directly or does a financial professional?
  9. What fees are associated with the account?
  10. Can you name a beneficiary to the account to use the funds if you are no longer living?

For more information on various retirement savings plans, contact your company’s human resources department or a financial advisor.
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