Taking Advantage of Your Employer-Sponsored Retirement Plan

Employer-sponsored retirement plans are powerful retirement tools. But how do you know if you're using your plan to its fullest potential? Here are a few tips to get you started:

Understand your plan

The first step toward taking advantage of your plan is to get a good idea of how your plan works. You can start by reading about your plan and talking to your employer's benefits officer. You can also talk to us, Brewprint Advisors of Raymond James, to get a more in-depth understanding; we’re here to help you. It is also helpful to understand the key features of many employer-sponsored plans:

• Your employer deducts your contributions from your paycheck with no work from you. You might not even miss the money--out of sight, out of mind.


• You decide how much you contribute, up to the legal limit. On certain dates during the year, you may even be able to change that amount.


• Some plans, including 401(k)s, have you contribute to the plan on a pretax basis. What this means is that your contributions come from your whole salary, before your employer withholds income tax.


• Some plans, including 401(k)s, might let you make Roth contributions. This means that you pay taxes on your money as it goes into the plan. There's no up-front tax benefit, but if certain qualifications are met, you might later be able to take out a distribution from your plan amount tax-free.


• Your employer might match some of your contribution up to a certain level. Depending on the plan, you might become entitled to include these employer dollars in your plan after you’ve worked with your employer for a certain number of years.


• You don't pay taxes on investment earnings, so the money in your plan can grow without being affected by taxes until you decide to take it out.


• If you decide to take money out of your plan early, you'll pay income taxes and an early withdrawal penalty.


• You might be able to borrow a part of your balance in the plan, up to $50,000, at a reasonable interest rate.


• Creditors can't ask for you to satisfy your debts out of your plan funds.

Contribute as much as possible

If you save more for retirement, then you have better chances of retiring comfortably. If you can, max out your contribution up to the legal limit. Why should you put your retirement money into your employer's plan instead of somewhere else? One reason is that if you contribute before tax, then your taxable income will decrease for that year. This means you save money in taxes when you contribute to the plan. Another reason is that your money will grow without tax. Your investment earnings will increase year after year tax-free, as long as they stay in the plan. You should end up with a much larger balance than someone who invests the same amount in taxable investments at the same rate of return.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a variety of investments to choose from. Choose carefully, because the right investment mix for your employer's plan could be one your keys to a comfortable retirement. Over the long term, different rates of return on those investments can make a big difference on the size of your balance.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

Research your options. How have they done in the past, over a long term? How have down markets affected them? Will they expose you to a lot of risk? Which ones are best suited for a goal farther down the road, like retirement? You might want help finding the answers to these questions, and for that, we're here for you. We can help you pick the investments that jibe well with your personal goals, your attitude towards risk, the time between now and your retirement, and so on. We can even help you coordinate your plan investments with any other investing that you do.

Know your options when you leave your employer

If you leave your job, what you have in your plan is yours to keep. You have many options from there, including:

• Taking a lump-sum distribution. What this means is that you would withdraw your entire balance out of your plan at once. Before doing this, you should keep in mind that you'll have to pay income taxes. You might also have to pay a penalty on this amount. You'll also lose the benefit of your money growing without any income taxes on that growth.


• You can leave your funds in the old plan, even after you leave your employer. In this case, they can still grow without being taxed each year. This might be a good idea if you're happy with the investments in your plan, or if you just need more time to decide what to do. This might not be an option if your plan's balance is under $5,000, or if you've reached the plan's normal retirement age, if your plan does not allow your funds to remain any longer, or if the plan is being ended.


• Rolling your funds over to an IRA or a new employer's plan. This might also be a good idea if you don't want to have income taxes or penalties on your plan money. Plus your funds might keep growing without being taxed. You should keep in mind that your old plan may withhold 20% of your balance for income taxes. You'll have to make up for this amount out of pocket when investing in a new plan.

We welcome further discussion of the pros and cons of each of these options with you, so feel free to get in touch with us.

*Any opinions are those of Michael Faircloth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or loss. Diversification does not guarantee a profit nor protect against a loss. You should compare your current account’s features, including fees and charges, before making a transfer decision. Distributions that are not properly rolled over to another retirement plan or account may be subject to withholding, income taxes, and if made prior to age 59 ½, may be subject to a 10% penalty tax.