6 Reasons Why You Need an Employer-Sponsored Plan

After working almost all your life, you deserve the time to enjoy the fruits of your labor. Touring the world, lavish getaways, expensive cars, and a high-end lifestyle without having to go to work every day. These are just a few of the perks that make every employee wish retirement came early. But one thing is for sure, all these nice things don’t just come served on a silver platter.

So how ready are you for your retirement? Sacrificing part of your income for your post-work life is an excellent financial move. In this piece, we’ll be looking at various retirement plan options, alongside compelling reasons why you should get an employer-sponsored plan.

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Common Types of Retirement Plans

When it comes to saving or planning for retirement, employees and businessmen have several options. While you can choose to just put money aside in your savings account, having a dedicated retirement account has numerous advantages. On this note, some common retirement plan options include:

  • Individual Retirement Accounts (IRAs)

Funded by the individual rather than through an employer.

  • Roth IRA

Funded by the individual. It is normally deducted from after-tax money.

  • SIMPLE IRA (Savings Incentive Match Plans for Employees) Plans

These plans are funded by contributions from both the employee and the employer. As described by the guys from TheEntrustGroup.com, they are common amongst small businesses with under 100 employees. They are usually offered as an alternative to 401(k) plans.

  • 401(K)

This one is the most common employer-sponsored plan. Many employers provide 401(k) plans, and the funds are deducted directly from the employee’s paycheck. This is a tax-advantaged plan offered by employers to their employees. It is named after a section of the U.S. Internal Revenue Code. Workers can make contributions to their accounts through automatic payroll.

The investment earnings in this plan are not taxed until the employee withdraws their money after retirement. The alternative option is the 403(b) plan, which also offers employees a way to save for retirement at no tax, but investment choices only serve private-sector employees.

  • Simplified Employee Pension (SEP) plans

Also common among smaller businesses, these are funded by the entrepreneurs. They are aimed at setting aside retirement funds for the business owner or/and some employees within the organization.

  • Profit-Sharing Plans

Funded by the employer from company profits.

  • Payroll Deduction Plans

Funded through salary deductions.

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Why Get an Employer-Sponsored Plan?

Under employer-sponsored plans, employees get to enjoy several perks, including a lower taxable income. However, not all employers offer these retirement plans, perhaps due to the lack of information or enough funds to contribute to these plans. Employees are encouraged to enroll in employer-sponsored plans for the following reasons:

1. Deferred Tax Advantages

The early mornings and late nights will pay off at the end of the month, but the government’s thought of slashing some pennies as tax is a thorn in the flesh. Now, how about a “tax-less” pay? You have to save and save until you retire. That is when you will be taxed when withdrawing your money.

2. Early Withdrawal Freedom

You are allowed to make partial withdrawals when you feel you are straining financially. However, the sum of your income with your IRA inclusive will determine your tax rate. Nevertheless, the more you withdraw before retiring, the higher the tax rates after retirement.

3. Safeguards From Creditors

We have seen many people declared bankrupt. Some survive the declaration while others drown and drain to their last breath. What did the ones who survived do that the others didn’t? Having insurance is one thing, and having your money in the proper account is another. No matter your situation, the creditors can never tamper with the money in your employer-sponsored retirement plan.

4. Financial Compounding

The money under your mattress gains you no interest! Get that money in a savings account and let it attract interest that is worth the investment. If you save the money until when you retire and it attracts a 10% interest per annum, how much will you have accumulated 30 years later? Then you wonder where retired people tend to have so much money. Do you now see where?

5. Easier To Save

In most cases, employer-sponsored plans deduct your contributions directly from your paycheck. This makes it easier for you to save for retirement compared to individual plans where the temptation to spend can alter your retirement savings goals.

6. You Can Save More For Retirement

As we have established above, some employer-sponsored plans can motivate you to save more money for use in your golden years. In a 401(k), for instance, the amount contributed by your employer (employer match) will directly depend on how much you contribute. This means that if you are committed to saving more, you will get more into your retirement account from your employer.

Imagine how you can survive after retirement with neither an income nor a side hustle? Saving early for retirement is one of the best things you can do in life. As we’ve seen above, there are many advantages to using an employer-sponsored retirement plan.

Interesting related article: “What is a Pension?