What’s the Difference Between Employer-Sponsored Retirement Plans and Private Plans?
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Having a retirement plan through your work is more common than you might think. Sure, it’s no surprise that pension plans are going the way of the dodo. But according to the U.S. Bureau of Labor Statistics, 69% of private workers and 92% of government workers had access to a retirement plan through their employers in 2023.
But for those who are self-employed, or even those covered employees who want another way to save for retirement, it can be worthwhile to look into private plan options. By doing so, you might find a better tax incentive or a higher contribution limit Here’s what you need to know.
Basics of employer retirement plans
Many people are missing out on the benefits available from their employer’s retirement plan. In 2023, only about half (52%) of non-government workers participated in their employer’s plan. If you’re in that group, it’s worth taking a look at what you’re missing.
Contributing to your workplace plan can not only help you save more for retirement, but a tax-deferred or pre-tax account—an account where your contribution isn’t taxed until you make a withdrawal—can also help you reduce your IRS bill.
These are some basics to know about the most common employer-sponsored plans:
- 401(k):A pre-tax plan with an annual contribution limit of $22,500 in 2023 (or $30,000 for people 50 and over)
- 403(b): Pre-tax plans that are similar to 401(k)s but are for employees of public schools and some nonprofits.
- SIMPLE IRA: A traditional IRA that requires the employer to make a contribution on behalf of the employee. Employees can also contribute up to $15,500 in 2023.
- Simplified Employee Pension Plan (SEP):Traditional IRAs that only the employer can contributes to, with a limit of 25% of the employee’s pay.
If your employer doesn’t offer a retirement plan, that could change soon. Keep an eye out for changes in the next few years, since the majority of U.S. states have proposed legislation that mandates employers to provide retirement plans.
Self-funded plans
People who are looking for their own retirement plans have several options to choose from, especially if they’re self-employed. Here are some options to consider:
- Traditional and Roth IRAs: Contributions to Roth IRA’s and traditional IRA’s are pre-tax, and people who have earned income can contribute up to $6,000 a year (or $7,000 if you’re 50 or older).
- SEP IRA:Self-employed people can use these accounts to save for their own retirement, or to contribute to employee retirement plans.
- Solo 401(k):These plans are similar to traditional 401(k)s, but they allow self-employed people with no employees to contribute up to $22,500 in 2023 (or $30,000 if you’re over 50).
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When to look for your own retirement plan
Most working households have very little money saved for retirement. In other words, there’s a good chance you stand to benefit from participating in your employer’s retirement plan or looking for a private plan. Here are a few specific instances where you’ll want to search for your own:
- Your employer doesn’t offer a retirement plan.
- You’re not eligible for your employer’s retirement plan.
- You’re self-employed.
- You’ve maxed out your contribution to your employer-sponsored plan but want to save more for retirement.
- You want to reduce your income tax bill through pre-tax retirement contributions.
Just keep in mind that there are times when contributing to retirement is counter-productive. If you have high-interest debt (such as credit cards), for example, you’ll want to pay it off before allocating all of your extra cash to retirement. Why? Because the cost of carrying the debt can far outweigh the benefits you get from saving.
You’ll also want to save some money for emergencies before opening a retirement account, since it can be extremely expensive to withdraw retirement funds early, which you’re more likely to do if you don’t have any money saved for emergencies.
What to consider if your employer provides an option
Getting the most out of your employer’s retirement plan can take a bit of strategy. Whether you’re hoping to maximize your plan, or you’re evaluating a potential employer’s retirement benefits, be sure to ask these question:
- When will you be fully covered by the plan?
- If the employer matches contributions, how much do they contribute?
- Is there a “vesting” period, or a period of time before you own 100% of the account balance?
- What is your contribution limit?
- Can you make an early withdrawal or take a loan against the account? If so, what fees and penalties are involved?
Employees should be able to locate these details in their Summary Plan Description.
Can you do both simultaneously?
You can contribute to multiple retirement accounts at the same time, including an employer sponsored plan and a private plan. By doing so, you can ensure you’ll be better prepared for retirement, and you can potentially lower your tax bill if you increase your pre-tax retirement contributions.
If your employer offers a match, you’ll likely want to start by maxing out their contribution, and then making deposits to a second account. However, it’s a good idea to consult with a tax professional before doubling-up, so you can ensure you’re using the best strategy based on your income, staying within annual contribution limits for each account, and avoiding any other potentially costly errors.
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