Employer-Sponsored Retirement Accounts

A 401(k) plan is the most common employer-sponsored account. Others available include 403(b) plans for public education organizations and nonprofits and 457 plans for government employers and workers.

Benefits of employer-sponsored plans

Employer-sponsored retirement accounts offer tax-deferred investment growth similar to an IRA with a few added benefits:

• A company match—In many plans, an employer will agree to match the funds you contribute up to a certain amount. For instance, a typical match is 50 cents on the dollar up to 6 percent of your salary. When you think about it, that match is virtually "free" money. You should always contribute enough to your 401(k) to capture the match.
   
• Automatic discipline—Your contributions are deducted automatically from your paycheck, making it much easier to save.
   
• Tax deferral on your salary—Contributions are pre-tax, unless you are contributing to a Roth 401(k)/403(b)/457(b) (see below) so you're generally reducing your taxable income by contributing to the plan. You are also deferring taxes on any investment income or realized capital gains until you withdraw from your account, usually after you retire.
   
• Higher contribution limits—You can contribute considerably more to a 401(k) or similar plan than you can to an IRA.

How employer-sponsored plans work

Step 1. If you work for a company that offers an employer-sponsored plan such as a 401(k), you generally need to enroll in the plan to participate (some companies provide automatic enrollment).

Step 2. When you enroll, you can choose the percentage of your salary you wish to contribute up to certain limits. You may need to save more than your employer's default rate to reach your goals by contributing more to your retirement plan or other investment accounts.

Once enrolled in the plan, your contributions are automatically taken out of your paycheck and deposited in your retirement account.

Step 3. Plans will offer you a choice of investments. Your contributions should be invested according to your situation. In other words, you'll want to make sure you choose a mix of investments that fit with your risk tolerance and time horizon.

Many employer-sponsored plans offer some type of investment education to help you make your investment choices as well as features that allow you to automatically increase your savings rate each year.

Step 4. Rebalance and monitor your investments. Some employers provide services and investment products that can help you do this.

The Roth 401(k)/403(b)/457(b)—another option

Roth accounts like the Roth 401(k) are a more recent addition to employer-sponsored plans. Similar to the Roth IRA, contributions are made with after-tax dollars, and you pay no income tax on withdrawals of earnings as long as you're age 59½ and you've had the account for five years or more. Unlike the Roth IRA, there are no income limitations to participate. Roth contributions may make the most sense if you think you'll be in a higher tax bracket in retirement. You may want to talk to your tax advisor before choosing a Roth 401(k) to make sure you understand what it can mean to both your current salary and your future withdrawals.