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Employer Savings Plans

From the moment we leave high school and embark on our journey of life, we are told by everyone that we need to save for the future and our retirement.  If you go on to college, your savings plan is delayed a few years while you complete four more years of education, but if you move directly into the workforce, you are presented with the option to begin saving for your future.  If your employer has a plan you are handed the forms to enroll, but at no time has anyone explained to you how the plans work or what the ideal amount is that should be saved.  What if your employer does not offer a plan?  Should we start our own?  What options do we have to begin saving?  The answers to these questions are not black and white but a resounding “it depends,” which makes it all the more frustrating.

A 401k is a retirement savings plan offered by an employer which allows its employees the opportunity to contribute a portion of their paycheck into an investment account.  With a 401k account, the employer may match a portion or all of the contribution.  The employee then has the opportunity to select the investments they would like to invest in, with most of the time these investments being mutual funds. 

When you make a contribution to a 401k plan, the funds you elect to contribute are deducted from your gross income.  This means that the contributions are deducted prior to taxes being taken out, which results in your taxable income being reduced.  Since the contributions are made prior to any taxes being taken out, no taxes will be due on these funds until you withdraw the funds which usually occurs in retirement. 

Within a 401k plan, an employer will offer different investment options.  The plan participant is responsible for choosing specific investments.  The Thomson Reuters plan offers a variety of mutual funds that are composed of stocks, bonds, and money market investments. 

Another perk of an employer 401k plan is the employer can match a portion or all of your contribution.  At Thomson Reuters, eligible employees will receive a 4% match on their entire contribution.  Below is an example of how this works:

                              Employee contribution per paycheck                                     $100.00

                              Thomson Reuters employer match                                         $   4.00

                              Total contribution to 401k                                                         $104.00     

The Thomson Reuters 401k plan also has a vesting schedule, which means how much ownership you have of the account balance.  Once you are 100% vested in a plan, the employer can’t forfeit or take back any of the account balance for any reason.  To be fully vested in the Thomson Reuters 401k plan, you need to be an employee for four years.  The vesting period is also graded which means each year you work at the company your vested amount moves closer to the 100%. 



              

 

Year

Employee 

Portion

Employer 

Portion

Account 

Balance

Vesting

Percentage

Vested 

Amount

1

$600.00

$400.00

$1,000.00

25%

$700.00

2

$600.00

$400.00

$2,000.00

50%

$1,600.00

3

$600.00

$400.00

$3,000.00

75%

$2,700.00

4

$600.00

$400.00

$4,000.00

100%

$4,000.00

 

The IRS does impose limits on the amount you can contribute to a 401k account.  For 2021, the maximum amount you can contribute to your 401k account is $19,500.  For 2022, that amount will be raised to $20,500.  There is also a catch-up contribution amount, ($6,500), for participants who are at least 50 years old.

What happens if your employer doesn’t offer a plan?  You do have the ability to begin your own retirement savings plan with either a Traditional IRA or a Roth IRA.  I will review these options in my next article. 

In closing, the important thing to remember is to take advantage of the opportunity to contribute to the Thomson Reuters sponsored plan.  If you have questions, please feel free to contact me at (612) 416-5997 or email me at mike.rebischke@lpl.com

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