Take Advantage of Employer-Sponsored Retirement Plans
Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available.
If your employer offers such a plan and you are not participating in it, you should be. Once you are participating in a plan, try to take full advantage of it.
Some Key Features of an Employer-Sponsored Plan
Contributions are deducted automatically from your paycheck. You may never even miss the money--out of sight, out of mind.
You decide what portion of your salary to contribute, up to the legal limit. In addition, you can usually change your contribution amount on certain dates during the year.
You contribute pre-tax dollars. Your contributions come off the top of your salary before your employer withholds income taxes.
Your employer may match all or part of your contribution up to a certain level. You typically become vested in these matching dollars through years of service with the company.
Funds grow tax deferred in the plan. You do not pay taxes on investment earnings until you withdraw your money from the plan.
Creditors cannot reach your plan funds to satisfy your debts.
Contribute as much as possible
The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to $18,000 in 2015 ($24,000 if you are 50 or older). If you need to free up money to do that, try to cut certain expenses.
Why put your retirement dollars in your employer's plan instead of somewhere else? One reason is that your pretax contributions to your employer's plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan--a big advantage if you are in a high tax bracket
Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren't taxable as long as they remain in the plan. Over time, this gives you the opportunity to build an impressive sum in your employer's plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.
Capture the full employer match
If you cannot max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are free money once you are vested in them. By capturing the full benefit of your employer's match, you'll be surprised how much faster your balance grows. If you do not take advantage of your employer's generosity, you could be passing up a significant return on your money.