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How to Make the Most of Employer-Sponsored Retirement Accounts

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How to Make the Most of Employer-Sponsored Retirement Accounts

Employer-sponsored retirement accounts – like 401(k)s and 403(b)s – are incredibly powerful tools for building a secure financial future. But simply enrolling isn’t enough. To truly make the most of these accounts, you need to understand how they work and how to strategically manage them. This guide will walk you through the key steps to maximize your benefits.

What are 401(k)s and 403(b)s?

  • 401(k): Typically offered by for-profit companies.
  • 403(b): Commonly offered to employees of public schools and non-profit organizations.

Both plans generally allow pre-tax contributions, meaning the money comes out of your paycheck before taxes are calculated, reducing your current tax liability. They often also offer employer matching contributions – a huge bonus!

1. Take Advantage of Employer Matching

This is crucial. Employer matching is essentially free money. Most employers offer a matching contribution, often up to a certain percentage of your salary. For example, an employer might match 50% of your contributions up to 6% of your salary.

  • Example: If you contribute 6% of your salary to your 401(k), and your employer matches 50%, they'll contribute an additional 3% to your account.

  • Don’t leave free money on the table! Calculate the maximum amount you can contribute to take full advantage of the match.

2. Max Out Your Contributions

The IRS sets annual contribution limits for these accounts. For 2020, the limit was 19,500(or19,500 (or 26,000 if you’re age 50 or older). While it’s tempting to contribute only enough to get the match, remember that you’re missing out on potential growth through investment gains.

3. Choose the Right Investments

Once you’ve maxed out your contributions (including the match), it's time to decide how your money is invested. Here's a breakdown of common options:

  • Target-Date Funds: These funds automatically adjust their asset allocation (mix of stocks and bonds) over time, becoming more conservative as you approach retirement. They’re generally a good starting point for beginners.
  • Index Funds: These funds track a specific market index (like the S&P 500) and offer broad diversification at a low cost.
  • Mutual Funds: These funds pool money from multiple investors to invest in a portfolio of stocks, bonds, or other assets. Be mindful of expense ratios (fees).
  • Individual Stocks & Bonds: While potentially more rewarding, this strategy requires more knowledge and carries more risk.

4. Understand Your Plan’s Fees

Pay attention to the fees associated with your plan. High fees can significantly erode your returns over time. Look for low-cost investment options and understand any administrative fees.

5. Don’t Touch Your Retirement Savings!

This is a golden rule. Retirement accounts are designed for long-term growth. Withdrawing funds early can trigger significant penalties and taxes.

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