In this article, we’re going to cover exactly how employer-sponsored retirement accounts work. If you have one already, or you are currently being offered one, this will help you get a sense of how the accounts work and what they mean for you.

The Basics of the Employer-Sponsored Retirement Account

First, the basics. An employer-sponsored retirement account is an account offered by an employer at little to no cost to the employee.^[1] This account is usually a 401(k) or other retirement account, and the contributions to those accounts are usually deducted automatically from your paychecks.^[1] It’s also possible that your employer will “match” your contributions, meaning they also contribute something to your retirement account in exchange for tax breaks on their end.^[1] Your contributions to this account are put toward a group of investments that you may or may not be able to choose depending on your specific plan.^[1]

The Traditional 401(k) Contribution and Withdrawal Rules

Most employers offer a traditional 401(k) option. Contributions to this kind of account are made with what are called “pre-tax” dollars, meaning that the money you contribute to the account is not taxed right away.^[1] The money you contribute to this account is taken directly from your paycheck before taxes are applied to it. You do have to pay taxes on the money, but with a traditional 401(k), you don’t pay those taxes until after you withdraw funds from the account.^[1]

The Roth Variation

Some employers will offer a Roth 401(k), which is similar to a traditional 401(k), except that your contributions are made after taxes.^[1] This means that the contributions are taxed before they enter the account, and withdrawals are not taxed as long as you follow a set of rules regarding how and when you withdraw your funds. ^[1]

What is the SIMPLE IRA?

Some employers also offer what is called a SIMPLE IRA, SIMPLE standing for Savings Incentive Match Plan for Employees. This is a pre-tax style account usually used by small businesses because it is not as complicated or costly to offer as a 401(k) or other options.^[2]

Retirement Account Strategy

With the various options out there, you may have access to both Roth and traditional employer-sponsored accounts, which means you can be strategic about how you use your taxed and un-taxed withdrawals or contributions. This adds a whole new dimension to your retirement strategy and is something to discuss with a financial professional.

There are many, many kinds of retirement accounts with varying strategies and rules governing each. You may even have several kinds of retirement accounts that you’ve acquired from several different jobs as you have gone through your career. If you are looking for someone to help guide you through the process of navigating these accounts, consider reaching out to one of our professionals for a complimentary review of your finances.