Starting Your Career? Take Advantage of Employer Retirement Plans

Learn how employee benefit plans like 401(k)s can help you get a jump on your retirement savings and potentially benefit from compound returns.

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6 min read

Key Takeaways

  • Determine how much you can contribute to a 401(k) and strive to make the maximum possible contribution

  • Consider other retirement options like IRAs if your employer doesn’t offer a 401(k)
  • Set up a yearly review to make sure your retirement investment plan still fits your goals and rebalance if necessary

If you’re just beginning your career, you may have prioritized paying off college debt and maybe saving for a vacation rather than retirement. Ironically, though, you should be focusing on both. 

Even as you start putting away some funds for the future, it is important to start chipping away at any debt. Keep in mind that there’s a cost of carrying debt on the books—in the form of interest payments. If your job has an employer-sponsored retirement plan, it pays to take advantage of it early on to benefit from the power of compounding to maximize growth potential.

Understanding Compound Returns

Compounding is when your initial investment grows along with your interest, giving your money the chance for more growth over time. That’s why it can help to start making your contributions as early as possible (it’s important to remember that investments don’t always grow, and could lose money).

JJ Kinahan, Chief Market Strategist, TD Ameritrade, calls compounding “one of the miracles of the world." And young investors can potentially benefit more than anyone. Because of compounding, those who start early can potentially end up with a lot more money in the end.

FIGURE 1: COMPOUND INTEREST. If you start early, your investments can benefit from the power of compounding. This chart shows the difference between two hypothetical investors—one who starts putting money away at age 21 when they enter the workforce, and the other who neglects to start early and waits until middle age. Source: TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Road to retirement: Stop for savings

How Much to Contribute? 

One thing you’ll need to determine is how much to contribute. If possible, you should consider investing as high a percentage of your income as your employer will match, as this can help you potentially get the most out of the matching contribution. For instance, if your employer will match a maximum of 3% of your contributions, consider contributing at least 3%. As financial experts often note, employer matches are “free" money.

If you contribute to any tax-advantaged accounts, such as a Roth IRA, try to contribute the maximum $5,500 a year (as of 2018) to that account before adding any amount to your 401(k) above the employer match level. The Roth IRA can be an important option for providing tax-free cash in retirement. That’s because with a Roth, you pay taxes when you contribute. So when it’s time to withdraw, you don’t pay any taxes.

Beyond the 401(k)

Other employer-sponsored retirement plans include 403(b) and 457 plans, which are often available if you work for a non-profit institution like a school, religious organization, or charity. Make sure you know the match or other employer contribution rules so you can max out the match or other contributions.

If you’re self-employed, freelance, or have a side gig, an SEP IRA might be an option, allowing you to contribute 25% of your income up to $55,000 for the 2018 tax year. You can change the percentage you contribute every year. You can skip years when you don’t have the money. You could even contribute once and never contribute again.

If your employer doesn’t offer a plan, consider fully funding an Individual Retirement Account (IRA) or Roth IRA up to the current maximum of $5,500 a year. If you are married and one spouse doesn’t work, the worker can typically put in the $5,500 for the non-working spouse. There are some nuances based on income and personal situations, so be sure to talk to your tax-planning professional. Some financial services firms can help explain the rules to help you feel more comfortable and attempt to get the most from your retirement plan.

Take advantage of any benefits fairs or webcasts your employer may offer about your employers’ benefits and potential changes to the company-sponsored retirement plan. It’s a good time to speak with professionals who can help you understand your options so you can make the best choices based on your unique situation.

Don’t Forget the Yearly Checkup

Once you’ve set up your 401(k) or other employer-sponsored retirement plan, remember to check it every year to make sure your investment mix is still where you want it. 

“When you’re 25, being 50 is outside of most people’s thought process, but one of the greatest investments you can make for yourself is to start putting money away at that age,” said Kinahan. “It should be an investment in the future of you.”

All investing involves risk, including the possible loss of principal. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your retirement account.

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Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different.

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