Updated: Dec 30, 2021
Employer-sponsored retirement plans offer an ideal way to boost your nest egg over time. Making regular contributions can help you save enough to have a steady income stream when you retire. But signing up isn’t enough on its own—you want to make sure you maximize your contributions.
Consider these tips to get the most from your employer’s retirement plan.
1. Use Pre-Tax Money to Save for Retirement
If your employer offers a 401(k), 403(b), or 457(b) plan, you’ll make contributions with pretax earnings from your paycheck. This reduces your taxable income, potentially saving you a bundle at tax time.
Contributions made to these plans will not be taxed until you withdraw the money, usually after age 59½. At that time, you’re likely to save money on taxes since your income will probably be lower in retirement.
2. Contribute at Least What Your Employer Matches
Ideally, you’ll want to set aside at least 15% of your pretax income for retirement. If your employer matches employee contributions, be sure to take advantage of the full amount: It’s essentially free money you can use to reach your 15% savings goal. Employers typically offer a dollar-for-dollar match up to a set percentage of your gross salary.
To illustrate, let’s say your employer matches 100% of employee contributions up to 3% of their annual salary. If your earnings are $36,000 per year and you contribute at least $1,080 (3%) to your retirement account, your employer will contribute another $1,080 to match it.
Review your plan documents to determine how much you should contribute to get the full 401(k) match. Otherwise, you will leave free money on the table.
3. Utilize Your Plan’s Investment Advisors
Not sure which funds are best to help you reach retirement goals? Reach out to your company’s plan administrator for additional guidance. They will connect you with someone, usually your company plan’s advisor, who can answer any questions you may have or offer advice to get you on the right track.
4. Set Up Automatic Contributions
Once you have retirement goals in place, consider automating your contributions to ensure you stay on track with your goals. Automatic contributions can also help with budgeting since the funds never reach your bank account—they go straight to your retirement fund. If you set your contributions to a percentage of your gross pay, they will increase each time your compensation increases—saving you even more money for the future.
5. Don’t Make Early Withdrawals
If you withdraw money from your retirement account early, you could be subject to a 10% penalty and may need to pay taxes on the withdrawn funds. Early withdrawals also prevent the power of compounding interest from fully working in your favor. If it is all possible, let your retirement savings stay put to help maximize growth over time.
6. Make Catch-Up Contributions if You Are 50 or Older
Consider using some of your disposable income to make catch-up contributions to your 401(k) plans, 403(b), or 457(b) plan if you don’t feel you’ve saved enough for retirement. These plans have annual contribution limits, but you’re permitted to contribute even more once you’re age 50 or older to increase your retirement savings. Catch-up contributions are also ideal if you started saving for retirement later and need an extra boost to ramp up your savings efforts.
The Bottom Line
By applying these strategies, you can maximize your employer’s retirement plan and possibly reach your retirement savings goals faster. You’ll also have peace of mind knowing you’re capitalizing on all the plan has to offer.
Allison Martin is a Certified Financial Education Instructor (CFEI), syndicated financial writer, and author. Her work has been featured in The Wall Street Journal, ABC, MSN Money, Yahoo! Finance, Fox Business, Credit.com, MoneyTalksNews, Investopedia, The Simple Dollar, and a host of other reputable publications. She also teaches the essentials of personal finance through seminars and workshops.