What does it mean to you if your employer offers a defined contribution plan? Defined contribution plans are employee workplace retirement plans which include accounts such as a 401(k) for private companies, 403(b) for nonprofits, 457(b) for state and local government employees, and Thrift Savings Plans for federal government employees. You define and contribute a fixed amount to your retirement account, and this amount is automatically deducted from your paycheck either before or after taxes, depending on the account type. Your retirement benefits are based on the amounts credited to this account plus any investment earnings on the money in that account.
Many employers will match a percentage of your contribution, up to a specific portion of your total salary. Matching contributions are essentially “free money,” so in many cases, maxing out employer contributions is most advantageous. The IRS stipulates that employees under the age of 50 can contribute up to $20,500 per year (as of 2020), and employees aged 50 and older can contribute an additional $6,500 per year. Each employer sets their own contribution terms, and not all employer contributions are the result of matching. We’ll help you understand exactly what your employer offers so you can decide your optimal contribution amount.
In the case of traditional 401(k), 403(b) and 457(b) plans, neither you nor your employer pay tax on initial contributions or accumulating plan earnings (unlike other interest-bearing or investment accounts where earnings are taxed on a yearly basis). Employees pay tax when they withdraw the funds, but until then the money grows tax-deferred. Under Roth plans, account holders pay tax when contributions are made rather than when funds are withdrawn, but, like traditional accounts, yearly earnings are not taxed. Accessing your money before age 59½ will incur penalties (in addition to any regular tax on withdrawals), with a few circumstantial exceptions, such as medical expenses.
Your needs are just as unique and dynamic as you. We’re here to help with all your personal and financial planning goals, both for today and tomorrow.
Knowing how much to spend and save, and how much to contribute to your defined contribution plan can be daunting at any life stage. But, this is what we do! Bring all your retirement planning questions to the financial professionals at MEA Wealth Advisors. We’ll help you find clarity so you can plan for success and enjoy retirement.