The Express Blog has a new series called the Basics of Benefits for U.S. leaders and job seekers.
Saving for retirement is an important consideration when looking at total compensation and benefits offered by an employer. Understanding your options for retirement accounts, whether provided by your employer or secured on your own, is key to preparing for the future.
According to Betterment’s Retirement Readiness Report, 72% of people are confident they can save enough for retirement. How much you should save may vary based on personal needs and the savings strategy you choose. It’s generally recommended to save 15% of your gross salary beginning in your 20s.
Terms to Know
Understanding common retirement terms is critical to making the best decisions for your retirement plan.
- Pre-tax: Pre-tax deductions reduce your taxable income, lowering your current tax liability.
- Traditional 401(k): Contributions to a traditional 401(k) are often made with pre-tax dollars, reducing your current taxable income. Withdrawals in retirement are typically taxed as ordinary income.
- Roth 401(k): Contributions to a Roth 401(k) are made with after-tax dollars. However, qualified withdrawals in retirement are tax-free.
- Individual Retirement Account (IRA): Different types of IRAs have different requirements and taxation depending on whether contributions are made pre- or post-tax, and when withdrawals are made.
Optimize Your Retirement Savings
The 401(k) is the most common type of IRA. Traditional and Roth IRAs are two types that allow for growth of funds over time but have different tax implications. Funds of traditional IRAs are taxed at the time of withdrawal, and Roth IRAs are pre-taxed when funds are added to the account via payroll deduction.
An employer may offer a matching program for a portion of the funds added to the account. If this benefit isn’t available through your workplace or you’d like multiple accounts, retirement accounts can be opened at financial institutions.
To optimize the growth potential of your retirement account, it’s important to research the investment options available and to make selections to invest the funds so they can compound over as much time as possible.
Vesting is an important consideration when researching the options presented by an employer-sponsored retirement account. Vesting refers to the process of acquiring ownership rights to employer contributions, and you typically need to work a certain number of years to fully vest in your employer’s contributions.
Pensions, Social Security, and Medicare may offer additional financial security during retirement, depending on eligibility. Learn more about preparing for retirement from the U.S. Department of Labor.
When choosing a retirement savings plan, it’s best to research all of the options and determine which would be most beneficial for your particular situation and goals. For questions specific to your employer’s offerings, reach out to your company’s HR or benefits team.
About Express Employment Professionals
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Check out previous posts from the Express Blog’s Basics of Benefits Series:
