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The Advantages of Your Workplace Retirement Plan

Did you know the average 401(k) balance in 2022 was approximately $113,000?1

Defined contribution plans, such as 401(k) and 403(b) plans, have become an important vehicle for retirement savings for many people because of their numerous advantages. For one, it’s an easy and consistent way to save because contributions are automatically deducted from the employee’s pay.

If your company offers a defined contribution retirement plan, it makes a lot of sense to participate as soon as your company allows. Here’s why:

  1. Reduce your current tax burden. Contributions into a Traditional 401(k) or 403(b) plan are made on a pre-tax basis and will not be taxed until the money is withdrawn in retirement. Every dollar contributed into your account will reduce your taxable gross income, resulting in less money owed in income taxes for that year.
  2. Grow your wealth by starting early. The earlier you can enroll and start contributing to your company’s retirement plan, the better. The greatest asset you have when saving during your career is time. As you can see in this chart, the sooner you start saving, the more time your money has to grow, thanks to compounding returns.

Key Plan Features

Not every employer’s plan offers the same retirement plan features. Therefore, it’s important to get to know your specific plan. A few key features to look for include:

An Employer-Matching Program: This is a powerful employee benefit where your company matches your contributions up to a certain amount (dollar or percentage). This match is essentially free money when vested that can be added toward your retirement savings. For example, an employer may match 100% of your contributions up to 3% of your compensation.

Roth 401(k): This feature allows contributions to be made with after-tax dollars and you do not pay Federal tax on qualified withdrawals in retirement. A Roth 401(k) can be an effective tax-planning tool if you expect your tax bracket to be lower now than in retirement. Unlike a Roth IRA, Roth 401(k)s do not have an income limit for contributions.

Target-Date Funds: These funds are often the default investment option if you are automatically enrolled in a 401(k) or 403(b) plan. They can serve as a maintenance-free retirement vehicle without having to make ongoing investment decisions. Depending on the target year, the fund’s asset mix automatically adjusts and becomes more conservative over time.

Don’t Delay Getting Started

Need help understanding features in your workplace retirement plan? A Jemma Financial Advisor can provide guidance on the role that employer plans play in your overall retirement plan. Contact us today to start a conversation.

1 How America Saves 2023, Vanguard.

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