Employer-Sponsored Retirement Plans

Employer-sponsored defined contribution retirement savings plans allow an employer to have savings directly deducted from an employees’ paycheck, provide tax breaks for the employee by deferring income, and, in some cases, an employer matching of employee contributions which boosts overall retirement savings.

Types of Employer-Sponsored Defined Contribution Retirement Plans

The major types of employer sponsored defined contribution retirement plans are 401(k) and Roth 401(k) plans for most private sector employees, Thrift Savings Plan for federal government employees, 403(b) plans for non-profit employees, and 457 plans for state and local government employees.  All of the plans except the Roth 401(k), provide for pre-tax contributions that reduce your current year taxes and investment options.  The Roth 401(k) plan contributions are made after the income is taxed, but when you withdraw the money later, the amounts taken out are tax free.

Maximum Annual Contribution

The maximum annual contribution amount for the employer-sponsored defined contribution retirement plans is $19,000 for 2019.  In addition, if you are 50 years of age or older, then you can make a catch-up contribution of $6,000 to your plan.  The only exception is when the employer has a 457 plan and a 401(k) plan, then the employees can contribute up to the maximum amount of $19,000 into each plan for a total of $38,000 and a higher amount for the catch up provision.

Employer Match

If you are fortunate enough to have an employer that has a matching contribution set up, then you should take advantage of the free money they are giving to you for retirement.  Generally, the matching contribution is a percentage of the amount that the employee contributes up to a maximum overall percent.  (i.e. an employee contributes 5% of their salary to a 401(k) plan and the employer matches the contribution by adding 5% on behalf of the employee to the 401(k) plan).

Strategies to Maximize Employer-Sponsored Retirement Plan Benefit

At a minimum, an employee that has an employer match as part of their employer sponsored retirement plan should take advantage of the gift by contributing up to the maximum matching amount, or at least as much as possible to avoid giving away free money.  If an employee has the Roth 401(k) option available to them it is the best option for long term growth and reduced taxes considering the current tax rates are at historically low percentages, so the likelihood of them going up in the future is high.  Therefore, paying taxes now at the lower rates is a better option than paying taxes on your retirement plan withdrawals in the future when tax rates will likely be higher.  The advantage is enhanced by the fact that earnings in a Roth 401(k) will not be taxed if a minimum holding period is met.  If the employer only offers a traditional before tax retirement plan, the tax deferral of current income allows an employee to reduce their current burden while they are in their prime earning years with many competing priorities for limited funds and allows them to finance part of their contributions with a reduced tax burden.