👀 The Employer Retirement Plan Playbook: Strategies for 2024 and 2025

☕ Good morning!

We’re back with another week of Making Cents of Your Money, where we dish out money-making and tax-saving gems quicker than a morning jog.  

For many people, retirement planning is as appealing as doing laundry. Yet, when you think of retirement as an exciting new chapter rather than a finish line, it takes on a whole new appeal. Imagine a future filled with world travel, quality time with family, and pursuing your passions without financial worries. 

That’s the vision we should aim for. The more specific you can be about the lifestyle, the better you can understand the steps needed to achieve that ideal lifestyle.

Employer-sponsored retirement plans are like the fast track to help you establish the foundation and meat on the bones of a hearty retirement, with additional strategic retirement accounts we’ll describe later on as the cherry on the cake. 

🧨 The Power of Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans, like the modern 401(k)s, have a rich history dating back to the late 1800s. 

These plans were initially “defined benefit” plans, aka pensions, which promised a specific monthly benefit upon retirement. 

However, the rising costs of pensions led to the popularity of “defined contribution” plans, such as 401(k)s, which shifted investment risks from employers to employees.

🕰️ A Quick History

• 1875: American Express established the first corporate pension plan.

• 1940s-1950s: Pensions became a standard benefit for many American workers.

• 1974: ERISA was enacted to regulate pension plans, establish minimum standards, and create the Pension Benefit Guaranty Corporation (PBGC).

• 1980s: Employers shifted to 401(k) plans due to the high cost of pensions.

Today, 401(k)s are the primary retirement savings vehicles, with legislative changes like the SECURE Act of 2019 and 2022 enhancing their benefits.

401(k)s offer a compelling benefit– save money on taxes today (contributions are with pre-tax money) and pay taxes on your withdrawals upon retirement, where you’ll presumably be in a lower tax bracket. 

💡 The Variety of Plans

Beyond 401(k)s, several types of employer-sponsored retirement plans exist.

🎒 403(b) Plans are for employees of public schools, non-profits, and religious institutions.

🚒457 Plans offer unique catch-up contributions for state and local government employees and certain non-profits.

💼Thrift Savings Plans (TSP) are similar to 401 (k) plans for federal employees and members of the uniformed services.

☀️The Simple IRA is designed for small businesses, allowing contributions up to $15,500 in 2024.

🎉SEP IRA is ideal for self-employed individuals and small business owners, with contributions up to 25% of compensation.

📈 Profit-sharing plans are where employers contribute a portion of the company's profits to employee retirement accounts.

💸 Contribution Limits and Employer Matches

Compared to other self-directed means of retirement, employer-sponsored plans like 401(k)s tend to be more effective due to their high contribution limits and potential employer matches. 

The total combined contribution limit for 401(k) plans in 2024 is $69,000 (or $76,500 for those aged 50 and older).

Maximizing your 401(k) contributions is like giving your retirement savings pre-workout, especially if you have an employer match program.

In 2024, contribution limits are $23,000 for those under 50 and $30,500 for those 50 and older. 

Employer matches are free money, so always contribute enough to get the whole match. 

For example, if your employer matches up to 6% of your salary, ensure you contribute at least that amount.

Consider diversifying your contributions if your employer offers a Roth 401(k). Roth 401(k)s are funded with after-tax dollars, meaning your retirement withdrawals are tax-free, providing a balance of tax-deferred and tax-free growth.

Depending on the design of your 401(k), you can legally contribute beyond the regular limits of individual Roths by doing a Backdoor Roth (or a Mega Backdoor Roth for larger sums.)

📊 The Anatomy of a 401(k)

401(k) contributions are made with pre-tax dollars, reducing your taxable income. 

The investments grow tax-deferred until withdrawal. Upon withdrawal, your funds are taxed as ordinary income.

Though pre-tax accounts offer the unique advantage of reducing your taxable income today, likely at a higher income rate than a salary-less retirement, they still risk being taxed at higher overall rates.

That’s where after-tax accounts come into play.

🏦 Use both pre-tax and after-tax accounts to manage tax risk and maximize retirement income.

For example, combining traditional 401(k)s with Roth 401(k)s provides a mix of tax-deferred and tax-free growth.

We shared the list of pre-tax retirement accounts above (Traditional 401(k), 403(b), 457(b), Thrift Savings Plan (TSP), Traditional IRA, SEP IRA (Simplified Employee Pension), Simple IRA, Profit-Sharing Plans, and more. 

After-tax retirement accounts include the Roth variations of these plans (Roth 401(k), Roth 403(b), Roth 457(b), Roth IRA), as well asNon-Qualified Deferred Compensation Plans, Life Insurance Retirement Plans (LIRPs), and Health Savings Accounts (HSAs) when used for qualified medical expenses.

🏁 Making Cents of Employer-Sponsored Retirement Plans

Starting early and staying proactive is critical, and getting automation on your side is advisable. 

Set an annual calendar reminder to review your contributions to adjust for new limits and increases in your salary– or work with a financial planner to set this on auto-pilot. 

Make your contributions as “set and forget” as possible with automatic contribution schedules to ensure you always contribute within the calendar end date. Use automatic rebalancing to help you maintain your desired asset allocation without manual intervention.

Combining pre-tax and after-tax accounts can optimize your tax situation and boost your retirement savings. This strategic mix allows you to manage your tax liabilities effectively and adapt to future changes in tax laws.

Diversifying your tax strategy is crucial with national debt climbing and the potential for higher taxes on the horizon. This balanced approach can protect you from unpredictable tax increases and make sure you keep more of your hard-earned money today and tomorrow.

Until next week!

Dan from Tailored Cents

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