If you are employed full time at a job with benefits (A.K.A. “a real job”) you probably are entered into an employee retirement plan. Often this is a 401(k) plan which gets its name from the section of the IRS tax code that defines it. In this type of employee retirement plan, a portion of salary is put into an interest-earning account. That portion of salary is deducted from the amount of salary that is calculated for income tax, producing a savings in income tax immediately.
No tax is paid on the amount invested in the 401(k) account or on its interest until the money is paid out. Payments from the account are considered regular income and are taxed accordingly. Often, the income of retirees is lower than it was when they were employed and pay a lower rate of tax on this money that was earned earlier.
Similar plans for employees of state and local governments are called 457 plans, while employees of educational institutions, churches, public hospitals and non-profits are covered by 403(b) plans.
The Annual Checkup
If you have a 401(k) plan or a plan that is comparable, you are entitled to check its progress every year. Usually, this is done in the fall, but you can choose a more convenient time if you like. Remember that an individual retirement account (IRA) replaces a one-size-fits-all fund. Your employee retirement plan is your individualized plan. Although sponsored by your employer and overseen by him or his outsourced representative, you make the choice of whether and how much you will contribute to your plan.
In order to make informed decisions about your individual employee retirement plan, you must have an idea of your future monetary needs. A variety of calculators and worksheets are available to assist you in understanding your needs. Once you do, you should review the progress of your retirement plan and make sure that it’s on track.
At the minimum, ensure that your contributions to your employee retirement plan are sufficient to receive the maximum employer matching contribution. If you need to increase your contribution, a further 1% each time your salary increases should do the trick. In this way, the increase will be fairly painless. Check to see if your plan is set up to allow you to control the type of investments that are made.
The Employee Retirement Income Security Act of 1974 (ERISA) dictates that an employer has a fiduciary duty to diversify investment holdings in retirement accounts. An employee retirement plan sponsor may get an exemption from that duty by allowing the individual account holders to decide how his or her funds will be invested. Your annual check up should include a close look at the type of investments you hold.
In addition to these important reviews, also take a look at the beneficiaries of your employee retirement plan to make sure they are up to date. Remember that your retirement account is as individual as your retirement plan and take charge of both.