A 401(k) Is Nice, But Not Necessary

A recent newspaper article commented on the difficulties our youth face in finding employment with companies that offer a 401(k). The article implied that this is a key factor when determining whether or not to take a job. With a recovering economy, I found this interesting. Getting a job should be your first priority, regardless of whether the employer offers a retirement plan.

While having a company retirement plan is a nice benefit, getting a job with a decent salary should be at the top of your priority list. Given the increasing cost of health care, a group health plan should be the next item you look for in order of importance.

Some employers may pay all or a portion of an employee’s health care premium. Coverage for your entire family, even if you pay the additional premium, is still a significant benefit.

There are many other elements to consider when looking for employment. Will the job help you achieve your career goals? How long is your daily commute? If the job requires significant out-of-town travel, will that fit within your family responsibilities? Will you get vacation time?

The article pointed out the power of the media, as well as how often the term “401(k)” is thrown about and made to appear of primary importance. However, a 401(k) is just one type of retirement plan, and if your company doesn’t sponsor any retirement plan, you can always save and invest on your own.

By way of background, a 401(k) is a type of retirement plan employers offer to allow employees to defer a percentage of their paycheck into an account for investing. Employees are then responsible for choosing how to invest that money from an array of investment options, generally mutual funds. The employer can choose to match a certain percentage of your contribution as an added benefit.

Amounts you defer into a traditional 401(k) will reduce your taxable salary and therefore your tax burden for that year. Your investments and earnings grow over time, and the income taxes on the assets in the account are paid down the road, when you make permanent withdrawals. If you elect to contribute to a Roth 401(k) account, you will pay tax on the full amount of your salary each year. However, you will not owe taxes in the future when you withdraw funds from the account.

A 401(k) is just one type of retirement plan. Nonprofit entities generally adopt 403(b) plans. Public companies can adopt a SIMPLE plan, a SEP plan, a profit sharing plan or a defined benefit pension plan. The goal of all of these vehicles is to save for retirement and invest for your future.

An employer may choose to adopt a given retirement plan based on the type of company or entity, the administrative requirements, the amount of money they wish to contribute for employees and the desired flexibility from year to year. For some reason, due to the attention 401(k) plans receive, it is often assumed that you cannot save and invest unless your employer helps you. This is a myth. You can set up investment accounts for yourself that have nothing to do with your employment or employer.

For instance, you can open an Individual Retirement Account (IRA) and, in 2016, make an annual contribution of $5,500 if you are under age 50 and $6,500 if you are over 50. Depending on your taxable income, these contributions can be deductible, helping to reduce your tax burden. You can also contribute the same amount to a Roth IRA, which will not give you a current tax deduction but grows tax free.

You can also open a regular investment account and invest for retirement without receiving deductions for contributions. You can save and invest as much as your cash flow allows in regular investment accounts. The sky is the limit.

The sooner you start to save and invest for retirement, the happier you will be when the day comes to stop working. When you look for employment, finding a job with a company that has a 401(k) is nice but not necessary. The company may simply offer a different type of retirement plan for you. It’s not ideal if the company doesn’t offer employees any type of retirement plan, but don’t worry overmuch. You can establish an IRA and regular investments accounts and save for your future in another way.

This commentary originally appeared November 5 on CasperStarTribune.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2016, The BAM ALLIANCE

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Connie Brezik, CPA/PFS, CFP®

As a wealth advisor at Buckingham Strategic Wealth, Connie works with clients to form a comprehensive financial plan tailored to their individual circumstances, one that includes portfolio management, tax strategies, wealth transfer considerations, retirement analysis and education planning. She welcomes the chance to help clients work through difficult situations, finding solutions that they may not have thought of and guidance about what to do if their plans don't work out as anticipated.

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