Retirement Benefits

A company-sponsored retirement plan can be a great way to save for your future. While you may think retirement is a long way off, planning for it now will pay off down the road.

Another reason to participate in the company retirement plan is that it may help reduce the taxes you pay, which helps you keep more of the money you earn.

Many retirement plans have rules you must meet before you can join. Usually, you must:

• be a permanent employee
• be at least 21 years old
• work at least 36 hours each week
  

There are two basic types of retirement plans:

1. Pension plans are plans paid entirely by the employer
2. 401(k) and 403(b) plans are plans where you and the employer both contribute money

Pension Plans
You may know someone who collects a pension. Usually, this means that a person worked many years for the same employer, and that employer set aside money for the worker's retirement. The money was put into a pension plan. After the worker retired, the pension plan started paying him or her a set monthly amount, based on how long the person worked for the company and how much he or she earned before retirement.

At one time, pension plans were common, but so was working for one company all your life. Times have changed. Now, most retirement plans offered by employers are 401(k) or 403(b) plans.

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401(k) and 403(b) Plans
The 401(k) plan is one of the most popular retirement plans used today. With such a plan, you tell your employer to set aside a part of each paycheck, up to federally set limits, and put the money into a special account.

Many employers match part of the money you contribute. For example, an employer might contribute 50 cents for every dollar you put into your retirement account, up to a certain percentage of your pay. In reality, this is free money for you, so when an employer provides matching funds, you should put in as much money as you can afford.

There are some tax benefits to 401(k) plans. Contributions are made with pre-tax income, which means the money is subtracted from your paycheck before taxes are assessed. So if you’ve made $100 in a day and $10 goes to your 401(k) plan, you’ll only pay taxes on $90 of that day’s earnings. In addition, all the earnings recorded in your 401(k) plan are tax deferred, which means you won’t pay current-year taxes on any interest paid to your account, no matter how large it is until you start withdrawing the money

The government will tax your withdrawals, and it also will assess a 10 percent penalty if you take it out before you retire. (There are some exceptions to this, such as if you are permanently disabled. Then, you can withdraw the money without a penalty, but you will still have to pay income taxes on it.)

Once you’ve funded your 401(k) plan, you'll have to decide how to invest the money. Usually, the employer offers several options such as stock or bond mutual funds. These types of investments are new for many people, so don't be embarrassed if you need to ask a lot of questions. It's just like any new subject that’s a little intimidating at first. Once you catch on, it becomes second nature.

A 403(b) plan is very similar to a 401(k) plan, except it’s offered to nonprofit organizations. Just like with a 401(k), you don't pay taxes on the money you contribute or on the fund’s earnings. You do pay taxes once money is taken out of the account when you retire. You also decide how to invest your contributions, and there are limits on how much money you can put into a 403(b) each year.

If your employer doesn’t offer a retirement plan, you can still save for your retirement. Look into opening an Individual Retirement Account (IRA), which allows you to contribute a certain amount of income each year. Like 401(k) and 403(b) plans, IRAs are often funded with pre-tax money and the amount you contribute grows tax deferred until you start withdrawing the money when you retire. You may contribute either to a regular IRA or a Roth IRA. Your contribution to a Roth IRA is made with after-tax money, meaning you do not get to take a tax deduction on that amount when you file your taxes. But when you retire, you will not pay income taxes on any of your withdrawals. There will be taxes due on the account earnings if you withdraw them prior to age 59-1/2.

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