84.9% of employees *(1) participate in 401(k) plans, and U.S. retirement assets represent a third of all household financial assets*(2). However, there is a generational gap when it comes to 401(k)s. According to a recent report by Bank of America, conducted in 2022, only *(3) 54% of millenials participate in 401(k) plans compared to 65% of Gen X employees. Another concerning fact: 61% of employees contributed less than $5,000 in 2021.
This data suggests that employees need more education about 401(k) plans. While most people believe they understand retirement savings, few know as much as they should. Even fewer workers know how to maximize their investment.
What Exactly is a 401(k) Plan?
A 401(k) plan is a form of retirement savings that many employers offer. How does it work? Essentially, funds are automatically deducted from an employee’s paycheck, before income taxes have been deducted, and invested in the plan. Many employers match up to a certain percentage for each employee. Employees who participate benefit by receiving a tax break on the money they save. No taxes are due on either the money contributed or the investment earnings until you withdraw the money, usually in retirement.As of 2023, the annual cap on contributions is $22,500 (or 30,000 for those over the age of 50). This means you can only set aside so much in a single year; however, very few employees are able to contribute this much. On the whole, plans such as 401(k)s help employees improve their financial well-being and *(4) reduce stress.
Are There Different Types of 401(k) Plans?
Yes. The two main types are traditional 401(k) plans and Roth 401(k) plans. The key differences between the two are as follows:
- Traditional 401(k) Plans come with tax breaks when you contribute funds from your paycheck pre-tax. Any money you set aside in this type of plan accumulates tax-free. The more you contribute, the more of your income you protect from taxation. However, when you go to withdraw assets, you’ll have to pay taxes.
- Roth 401(k) Plans grow tax-free, much like traditional 401(k) plans. The additional benefit you receive with a Roth 401(k) is not having to pay taxes when you make withdrawals during retirement. This is possible because you’re allowed to contribute after-tax income with this type of plan.
How Can Employees and Employers Benefit from 401(k) Plans?
Employees should be familiar with the benefits of 401(k) plans. One of the great things about this form of savings is you can take your plan with you when you switch jobs. You can also choose and modify how much you contribute at any time. Furthermore, 401(k)s can lower your taxable income and potentially place you in a lower tax bracket.
Employers who offer top-tier benefits attract top-tier talent. Better benefits packages retain talent as well. Employees are able to take their plans with them upon leaving the company, and Employers can choose to match employee contributions up to a certain percentage. Workers are more likely to stay committed if they are offered additional perks and incentives. Beyond these advantages, generally, the employer contributions can be deducted from employers federal income tax returns. Employee elective deferrals and investment gains are not taxed until withdrawn.
Collaborate with TriBridge Partners to Help Enhance Your Benefits Package
Are you looking to provide a benefits package that includes a 401(k) plan? TriBridge Partners is ready to help! To discover how our team can assist your organization or business, please call our office today at 240-422-8799, or email Jessica Storck at Jessica.storck@tribridgepartners.com.
Provided by My Content Co. courtesy of TriBridge Partners.
This article is educational and is not advice or a recommendation for any specific investment product, strategy, or service. The views and opinions expressed are those of My Content Co. Any examples used are generic, hypothetical and for illustration purposes only. Investing involves risks, and past performance is not indicative of future results.
*(1)Correia, Margarida. “PSCA: 401(k) Participation up, as Well as Contributions.” Pensions & Investments, 11 Dec. 2018, www.pionline.com/article/20181211/ONLINE/181219870/psca-401-k-participation-up-as-well-as-contributions
*(2) Wohlner, Roger. “Planning for the Estate and Gift Tax Exclusion: What to Know.” ThinkAdvisor, 7 Dec. 2022, www.thinkadvisor.com/2022/12/07/the-estate-and-gift-tax-exclusion-shrinks-in-2026-whats-an-advisor-to-do/.
*(3) “401(k) Contributions Lagging, Especially among Millennials: Bofa Survey.” InvestmentNews, 13 July 2022, https://bit.ly/3O13IIT
*(4) Author, iGrad. “Data Shows Strong Link between Financial Wellness and Mental Health.” Enrich Financial Wellness, 24 Mar. 2021, www.enrich.org/blog/data-shows-strong-link-between-financial-wellness-and-mental-health.
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