When you start a new job, one of the key things to look out for is the opportunity to sign up for your employer’s retirement plan. Two of the most common plans you might hear about are the 401(k) and the 403(b). But what exactly are these accounts, and how do they work? Let’s break it down in simple terms.
Understanding Employer-Sponsored Retirement Plans
Both the 401(k) and 403(b) are retirement plans offered by your employer. They allow you to save for your future while also offering some tax benefits along the way. When you enroll, a portion of your salary is automatically deducted and placed into one of these accounts.
In most cases, these plans are tax-deferred. That means you don’t pay taxes on the money you contribute now; instead, you’ll pay taxes when you withdraw it in retirement. This lowers your taxable income in the present, which is great for reducing your tax bill.
There is also the option of a Roth 401(k) for some 401(k) plans. With a Roth, you contribute after-tax dollars, which means you won’t pay taxes on your withdrawals in retirement. It’s a good option if you think you’ll be in a higher tax bracket when you retire.
The difference between the two plans mainly lies in the types of employers that offer them. 401(k) plans are offered by private, for-profit companies, while 403(b) plans are typically available through nonprofits, schools, and certain government organizations.
Employer Matching Contributions: Free Money for Your Future
One of the best parts of a 401(k) or 403(b) is the potential for employer matching contributions. Here’s how it works: your employer may match a percentage of the money you contribute to your retirement plan. For example, if you contribute 3% of your salary, your employer might add another 3% to your account.
That means 6% of your salary is going into your retirement savings, and half of that is basically free money! To take full advantage of this benefit, make sure you’re contributing at least enough to get the full match.
Ideally, if you can, aim to contribute even more. The more you can save for retirement now, the better off you’ll be when you’re ready to retire.
How to Save More for Retirement
The earlier you start saving, the better. Financial advisors often recommend saving 10-15% of your income for retirement. If you can manage to increase that percentage over time, that’s even better. It might be tough to save this much at first, especially if you’re just starting out in your career, but don’t worry—it gets easier as your salary increases.
One great tip is to set up your retirement contributions to automatically increase as you get raises. For example, if you receive a raise of $4,000 per year, consider directing half of it into your retirement account. That way, you can start saving more without impacting your current budget.
Over time, this strategy can really help your account balance grow. The earlier you start, the more you’ll benefit from compound interest, which can turn small contributions into a significant nest egg.
Catch-Up Contributions: It’s Never Too Late to Save
What if you didn’t save as much as you wanted earlier in your career? Don’t panic—it’s never too late to catch up.
If you’re over 50, you can take advantage of catch-up contributions, which allow you to contribute more than the standard limit. This can be especially helpful if you feel like you’re behind on your retirement savings.
Your CERTIFIED FINANCIAL PLANNER™ (CFP®) can help you figure out exactly how much you need to contribute each year to reach your retirement goals. They can help you run the numbers and develop a strategy for saving that works for you, no matter where you are in your career.
When Can You Start Withdrawing?
You can begin withdrawing from your 401(k) or 403(b) at age 59 ½, but you’re not required to. Many people associate retirement with age 65, but that’s just a common milestone, not a rule. If you want, you can continue working past 65 and keep contributing to your retirement plan.
Some people even choose to work part-time during retirement, allowing them to stretch their savings even further. The key is to plan ahead, so you don’t have to rely solely on your savings when you do retire.
Take Advantage of Your Employer-Sponsored Retirement Plan
If you’re offered a 401(k) or 403(b) plan at work, don’t pass it up! These accounts can be a cornerstone of a solid retirement strategy. If your employer offers a matching contribution, it’s essentially free money—so make sure to contribute enough to get that match.
And remember, it’s never too early (or too late) to start saving. The more you save now, the more comfortable your retirement will be in the future.