Understanding Retirement Benefits when Accepting a Job Offer

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f2bb142d-337f-48cb-a0e3-817e88bfb12aAn article by contributor Rachael Murphey.

A job offer isn’t only about salary. There are a number of benefits associated with being a full time employee, including healthcare, vacation days and the opportunity to begin saving for retirement. There are many employers today who offer their workers a retirement savings plan known as a 401(k). This enables an employee to have money taken from their paycheck and put into a retirement account prior to taxes being taken out. The taxes associated with a 401(k) are only paid when funds are taken from the account.

There is no time like the present to begin thinking about your retirement, and the earlier you start saving, the easier it will be! It’s important to understand and weigh all the possible benefits you may be offered alongside your salary, and it may help you make a decision between two competing offers.

Tax Code

The name 401(k) is taken from the section of the US tax code that covers these types of retirement accounts. They were started in the 1980s with the purpose of being a way for individuals to supplement their pensions. It has been common for a long time for a company to offer its employees pension funds. The costs associated with providing pensions became too expensive for many employers. They started replacing them with 401(k) retirement plans. These plans made it possible for an employer to match the employee’s contribution to the retirement plan.

Time With Company

There are many advantages to investing in a 401(k) retirement account. These accounts have a number of restrictions. In many cases, a person must work at a company for a specified period of time before having access to an employer’s contributions. The employee’s payment can start being made immediately. This is considered an incentive for an employee to stay with a company longer.

Roll Over

When an employee leaves their employer, they will be able to roll over their 401(k) account. This means the funds in this account can be transferred to another established 401(k) account and no tax will have to be paid. The check from the 401(k) will be made out to an account at an approved financial institution. Should an employee leave their employer and take any type of distribution from their 401(k) account, it could be subject to tax and penalties. Financial experts agree that when individuals have 401(k) accounts with multiple former employers, they should consider consolidating all the funds into a single retirement account.

Creditor Protection

A person’s 401(k) plan is protected by law. Many financial experts will advise a person against using the funds in their 401(k) to avoid a foreclosure or pay off debt. It is also advised the funds in a 401(k) never be used to start a business. Should a person experience a situation where they file for bankruptcy, their 401(k) funds are protected. The money in these accounts should not be used except for retirement.

Roth Accounts

An increasing number of 401(k) plans are providing an option to make Roth contributions. This is known as a designated Roth account. These types of contributions are not tax-deductible. The value of the account does grow tax-free. When the time for retirement comes, the withdrawals a person makes from the account will be tax-free.

Company Stock

Should a person be part of a company’s employee stock ownership plan, their 401(k) may have special tax rules that apply. This rule is known as the net unrealized appreciation. This makes it possible for a person, at the time of their retirement, to take a distribution of company stock and only pay income tax on the stock’s cost basis. A person can then sell the stock. This will require them to pay the capital gain tax rate. This is usually lower than the tax paid on the stock’s cost basis.

Conclusion

When most individuals work for a company, the subject of retirement plans offered is often discussed at employee orientation. It’s important that people not ignore the opportunity to invest in a 401(k). It’s also important they understand how such a fund can help them in the future. The designated percentage of a person’s income they give in exchange for retirement income is something that can increase in value all during their working career.

Rachael Murphey is a recent graduate from the University of Colorado Boulder. She writes on entrepreneurship, finance, and personal success. She currently lives in Denver with her dog Charlie.


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