When it comes to saving for retirement, companies offer many different types of retirement plans. Among the most popular are 401(k) plans which allow employees to contribute a percentage of their income to their personal retirement account. With a 401(k) plan, most employers will match a portion of the employee's contribution, providing an immediate boost to the individual's savings. However, the perks don't stop here, let's discuss some of the lesser-known benefits of 401(k) plans for your employees.
1. Employer Match
o A 401(k) is a type of employer-sponsored retirement plan. Under a 401(k), companies have the choice to match personal contributions and boost saving opportunities for their workers. An employer will typically choose to match either a percentage of the employee's contribution or will match the contribution dollar-for-dollar up to a maximum percentage. Either way, matching contributions add more savings to the employee's retirement.
2. Contribution Limits
o Each year the IRS sets the maximum contribution limits for 401(k) and other retirement plans. Even with a contribution limit, employees can still save more for retirement than using IRAs. For 2021 the limit for employees under age 50 is $19,500 and for employees who are age 50 or older the limit is $26,000. Employer matching contributions do not count toward the annual limit, however, the combined employee and employer match cannot exceed, the lessor of, 100% of the employee's salary or $57,000, ($63,500 for 50 and older employees).
3. Financial Protection
o Under the Employee Retirement Income Security Act, 401(k) plans offer some protection from federal tax liens, which are government claims against the assets of a taxpayer with unpaid back taxes, as well as protection from creditors. ERISA requires plan sponsors to disclose information such as administrative expenses, historical fund performance and ensure that workers have access to stable funds so they can make informed decisions.
4. Convenience with Automatic Enrollment
o Employees want to save for retirement in a way that is simple and convenient to do. 401(k)s check off both of these boxes by offering the ability to have an automatic enrollment feature in the plan. Many companies automatically enroll new hires into their company’s 401(k) plan, which boosts savings for the employee as soon as they're eligible. Once enrolled, employees can also modify their, making it easy and convenient to save for retirement without additional steps.
5. Continued Contributions after 72
o For IRSs, individuals typically cannot contribute after obtaining age 72, even if they are still working. However, this is not true for 401(k) plans. With a 401(k) plan, employees can contribute to their retirement account as long as they work and non-owner participants can delay taking distributions as long as they're employed.
6. Tax Advantages
o With a 401(k), contributions may be made on a pre-tax basis, which allows your contributions to be taken from the paycheck before federal taxes are withheld. This means that your total taxable income is lower leading to less owed in income taxes, regardless of whether an itemized or standard deduction is taken. Your pre-tax contributions will be tax-deferred until you withdraw them.
7. Complete Control
o To begin saving with a 401(k) plan, the employee must choose how much they would like to contribute. This means that they have complete control over how much or little they want to control as long as it meets the IRS limits. In addition, employees also have the flexibility to change their contribution percentage on the modification dates stated in the plan document.
When it comes to saving for retirement, saving early and consistently is key to preparing, even if you're just beginning your career. Retirement saving does not have to be confusing, by joining your employer-sponsored retirement plan, you can take advantage of the numerous benefits of 401(k) plans that we discussed today. If you have questions about 401(k) plans or how to save for your future – contact a member of the RPCSI team today. As your retirement plan experts, we are here to help every step of the way.
