How to Take Advantage of Employer-Sponsored Retirement Plans

Katie DuncanJuly 2, 2021


Money getting bite taken out of it

Employer-sponsored qualified retirement plans such as 401(k)s are some of the most powerful retirement savings tools available. These plans, which are offered through your place of work, often come with a number of benefits that other retirement accounts don’t offer. Though a retirement account will do a lot of the work for you, there are some steps that you can take to help maximize your investment. We have five tips to help you take advantage of your plan now to ensure that you’re financially secure down the road.

What is an employer-sponsored retirement plan?

An employer-sponsored retirement plan is one of several benefits that an employer may offer to their employees. These plans, like 401(k)s, give employees a way to financially prepare for retirement. Other benefits of employer-sponsored 401(k)s include:

  • High contribution limits. You can contribute more to a 401(k) than you can to an IRA.
  • Possible employer matching. Some employers will match their employee’s savings up to a certain dollar amount or percentage.
  • Tax benefits. Contributions on a 401(k) are done pre-tax, which lowers your taxable income (and therefore taxes) any year that you contribute to the plan.

Is a 403(b) an employer-sponsored retirement plan?

If you have a 403(b) plan instead of a 401(k), you may be wondering whether or not your retirement plan is considered employer-sponsored.

In short, a 401(k) and 403(b) are very similar. The main difference is that 401(k)s are sponsored by for-profit employers. 403(b) plans are only available to employees of government and nonprofit organizations.

How to Get the Most Out of Your Plan

Here are six ways that you can maximize your employer-sponsored retirement plan balance.

1. Ensure you fully understand the plan.

The first key to getting the most out of your retirement account is to fully understand the ins and outs of the plan. Read any resources you have received and be sure to talk to your employer’s benefits officer. If you are still unsure about how the account works or how it fits in with your financial situation, you can also talk to a financial planner or a tax advisor.

Some key features that many plans share (and that you may have questions about) are automatic payroll deduction of contributions, flexibility of salary deducted up to the legal limit, income tax deferral on contributions made to the plan, and protection of plan assets from creditor claims.

2. Contribute as much as possible.

Employer-sponsored accounts have a higher contribution limit than other accounts such as traditional and Roth IRAs. In 2021, those 49 years old and younger can contribute up to $19,500 in a 401(k). IRAs, on the other hand, have a maximum contribution limit of only $6,000. To maximize your savings, simply max out your contributions to the account, if possible.

And as we mentioned earlier, pretax contributions to your employer’s plan lowers your taxable income for the year. Participations also allow you to tap into the power of tax-deferred growth. Your investment earnings that compound year after year aren’t taxable as long as they remain in the plan. Over the long term, this allows your money to work harder for you.

There is one more important reason to contribute as much as your financial situation allows: compound interest. It may seem complicated, but the principle is simple: the more money you have invested, the more interest earnings you’ll accumulate. If you keep the earnings in the same retirement account, you’ll then be earning interest on interest. This has a snowballing effect, resulting in the potential for exponential growth over a period of several decades. The more money you put in now, the more you can maximize the potential for investment earnings.

3. Take advantage of your employer’s match.

Many employers do more than just offer the plan— they’ll also match the money that you put into the account. The match formula can vary from employer to employer, but it’s common to see a matching of 50 cents for every dollar that you save, up to 6% of your total pay.

Let’s break that down. Your employer will contribute 0.5% for every 1% you contribute, up to 3% total—but only if you also contribute. So if you put in 2% of your salary, they’ll match with 1%. If you contribute 6%, they’ll contribute the maximum–a full 3% of your total salary.

Matching contributions vary per employer, so be careful to identify exactly what the matching percentage is, and how you can maximize this benefit. Contribution matching is an easy way to get to your savings goals quicker. If your employer offers this, be sure to take full advantage of it.

4. Staying Until You Are Vested

Employer contributions typically require something called a vesting period. In other words, you won’t keep the matching funds until you’ve worked for the company for a specific amount of time. While you will always be entitled to the money that you contributed, you may have to forfeit all or part of your employer’s match if you leave the company before you are vested. Keep this in mind if you are considering taking a job elsewhere. Be sure to check with your employer’s policies for more information on vesting.

5. Know your options if you leave your employer.

If you do leave your job and go elsewhere, your vested balance in your former employer’s retirement plan is yours to keep.

At this point, you can do several things with your funds:

  • Take a lump-sum distribution. This is often a bad idea because you’ll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you’re giving up continued tax-deferred growth.
  • Leave your funds in the old plan. If you have enough money in the account, you’ll be able to leave your money where it is. This may be a good idea if you’re happy with the plan’s investments or you need time to decide what to do with your money. The downside is that you’ll have retirement money scattered across different accounts and you may miss out on important communications since you’re no longer with that employer.
  • You can roll your funds over to an IRA or a new employer’s plan if the plan accepts rollovers. This is often the smartest move. Consolidating your retirement funds makes managing them easier. Rolling over your money also gives you the most investment options. If you do this properly, you won’t have to worry about income taxes or penalties.

Knowing your options when you leave your employer can ensure you make the right choice for yourself and your money.

6. Withdraw your retirement wisely.

One of the biggest mistakes you can make with your retirement account is cashing out early. If you withdraw before age 59 ½ , you will face a steep 10% withdrawal penalty. Taking money out of your retirement account early also means that you’ll miss out on compound interest!

However, after age 72 you’ll be subject to required minimum distributions. You must withdraw a certain amount annually from your 401(k), or you’ll face a penalty: 50% of the amount you should have withdrawn. As you get closer to 72, make sure you’re aware of this number. Talk to a financial advisor so you can build a solid post-retirement financial plan.

Make Your Employer-Sponsored Retirement Plan Work for You

Knowing how to make your employer-sponsored plan work for you is one key to securing your financial future. By understanding your plan, contributing as much as you can, and knowing your options when you leave your job, you can maximize the plan’s growth potential. And more money in your account now means less to worry about later!

* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Before deciding whether to retain assets in an employer-sponsored plan or rollover to an IRA an investor should consider various factors including but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Before you elect to open an IRA account and engage your investment representative, please review all account statements and disclosure documents related to the IRA and services to be provided under a new relationship and consult with a qualified tax advisor as needed. If transferring an existing retirement plan into an IRA, you should be aware that (i) Those assets will no longer be subject to the protections of ERISA (if applicable) (ii) depending on the investments and services selected for the IRA, you may pay more or less in transaction costs than when the assets are in the Plan, (iii) if you are between the age of 55 and 59 ½, you would lose the ability to potentially take penalty-free withdrawals from the plan, (iv) if you continue working past age 70 ½ and transferred your plan assets to a new employer’s plan, you would not be subject to required minimum distribution and (v) withdrawing assets directly would be subject to federal and applicable state and local taxes and possibly be subject to the IRS penalty of 10% if under age 59 ½.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

Talk to a CFS Financial Advisor

Want to take your retirement plans to the next level? Schedule a Amplify Wealth Management appointment with our colleagues at CUSO Financial Services (CFS).

Katie Duncan

Katie Duncan is a financial writer based in Austin, Texas. Her articles include financial advice for freelancers, homebuyers, and more. When she’s not writing, Katie loves traveling and exploring the outdoors with her friends and her dog, Poe.