Among the best-known employee benefits are retirement savings plans. Everyone needs to save for retirement, and the tax advantages of a 401(k) or 403(b) plan can't be matched by a plan you create yourself. (Even self-employed people can start up retirement plans of their own, such as individual 401(k)s, SEP IRAs or Keoghs.)
"Your contributions are made on a pre-tax basis so there are tax savings, and often companies will make matching contributions based on your contributions," says Marty Moore, a Certified Financial Planner with TriCapital Financial Group in Charlotte, North Carolina.. "Plus, investment earnings in the retirement plan are tax-deferred until money is withdrawn at retirement."
If you earn $30,000 a year and you save $5,000 annually to your employer-sponsored retirement plan, you'll be taxed on $25,000 of earnings. You could end up in a lower tax bracket, and you'll essentially be able to keep more of your hard-earned money.
In 2003, you can save $12,000 to a 401(k), and that number will go up each year until it reaches $15,000 in 2006. (Workers over age 50 can make additional so-called "catch-up" contributions to boost their savings. The numbers are rising each year, but in 2003, you can contribute an additional $2,000.)
Employer matching funds for these retirement plans are an additional big incentive. Many bosses will pitch in 50 cents for every dollar you save, up to 6 percent of your salary. That's free money, so planners recommend that at the very least, you contribute enough to get the full matching funds.
There are very few reasons not to save in your employer-sponsored retirement plan. If your employer offers only very limited investment choices, such as your own company's stock, financial planners say you shouldn't put too much of your savings in the plan because you'll be betting your retirement on the future of a single company -- not a smart strategy. And if you have lots of debt, consider putting your extra cash towards paying it off because you're probably paying more in interest than your investment will earn in the retirement plan.
For more on employer-sponsored retirement savings plans, check out these stories:
Continued on page 3: Savings Accounts: Flexible Spending Accounts