Don’t Leave Money on the Table, Participate in Your 401k
By James H. Cosgriff IV, CFP, CPA
Over the last 30 years, there has been a shift in employee retirement plans. The days of the gold watch and a guaranteed pension for life are all but over for individuals working for private companies. The responsibility of saving for retirement has been transferred from the employer to the employee.
In the 1980s a new retirement account called a 401k was created to allow employees to save and invest for their retirement. If your company offers a 401k plan it is imperative that you participate and contribute. An employee that contributes to a 401k will experience the tax benefits associated with contributing. Most employees have the option of contributing their money on a pre-tax basis or on an after-tax basis called a Roth 401k contribution. A pre-tax contribution reduces your taxable income dollar for dollar. So for example, if an employee makes $50,000 per year and contributes $5,000 on a pre-tax basis when they file their tax return they will only report $45,000 as income for that year. The $5,000 will continue to grow and the earnings will not be taxed until you begin to withdraw that money in retirement. In the example above, if an employee decides to contribute on an after-tax basis all $5,000 will be taxed this year on their return but the money will not be taxed again including the growth on the contributions. You will have the benefit of tax-free withdrawals in retirement. To discourage employees from taking money out of their account to use for personal expenses the government imposes a 10% penalty if you take your money out before age 59 ½, as well as taxing you at ordinary income rates. Currently, in 2018 an employee under age 50 can contribute up to $18,500 while an employee over age 50 can contribute an extra $6,000 for a total of $24,500. In addition to this many employers offer a contribution match which can be added to your account in addition to the amount you are contributing. By not participating you are leaving money on the table from your employer.
Participating in a company-sponsored 401k plan is a win-win for employees. They are saving and investing for retirement, giving themselves a current tax deduction, and receiving money from their employer on top of their normal wages to help them grow their retirement accounts.
About the Author
James Cosgriff, CFP, CPA, provides financial solutions to individuals, trusts, businesses and employee benefit plans. He also provides guidance to clients nearing retirement to create a plan for drawing down savings in the most tax efficient manner possible.
He joined Dopkins & Company, LLP in 2014 as a senior associate in the Tax Advisory Group, helping both business and individual clients with his tax compliance and tax planning expertise. In 2016 he transitioned to Dopkins Wealth Management.