Company retirement plan
Employer-sponsored retirement plans are the most typical way people invest money through their employers. The most common retirement plan is the 401(k). These plans are usually employer-sponsored, and they enable the participant/employee to invest up to $17,500 per year ($23,000 if you’re age 50 or older) toward your retirement.
Probably the biggest advantage of the 401(k) plan is the tax-deferred feature. Not only are your contributions to the plan tax-deductible in the year they’re made, but investment earnings on your contributions accumulate on a tax-deferred basis until you begin withdrawing funds from the plan. And by then, you’ll most likely be in a lower tax bracket.
Very often the employer will make a matching contribution to the plan. A common arrangement is a 50% match up to a 6% employee contribution. The employer will contribute 3% of your pay to the plan, which in addition to your 6% contribution, will provide a 9% annual contribution into the plan.
Setting up this plan with your employer is simple. You’ll usually be eligible to participate in the plan after a certain waiting period — usually anywhere from 30 days to six months or more. After your initial hire, there’s usually an open enrollment period during certain times of the year.
The employer provides the necessary paperwork you must complete in order to begin funding the plan. One of the most important considerations will be setting up investment allocations. Though you do have the option to accumulate money in the plan, and then invest it in any of the choices available, it’s generally much easier to establish specific investment allocations when you are filling out the paperwork.
Pre-determined allocations will give your 401(k) plan the benefit of an “automatic pilot” investment feature. Your contributions — all from regular payroll deductions — will go into the plan, and be allocated between the various investment choices based on your portfolio allocation.
Non-employer sponsored retirement plans
Even if your employer has a company provided 401(k) plan, you still have the option of contributing money from your salary into a non-sponsored retirement plan, such as a traditional or Roth IRA. This is even more important if your employer doesn't have a sponsored plan.
While most people know they can contribute to a 401(k) plan out of their paycheck, not nearly as many are aware that you can do the same thing with a non-sponsored plan, such as an IRA. But there are actually a large number of mutual funds that will allow you to make periodic contributions with direct deposits from your payroll in order to fund an IRA.
This can be particularly beneficial since a self-directed IRA typically has far more investment options than a company-sponsored 401(k) plan. Under either a traditional or Roth IRA, you can contribute up to $5,500 to the plan each year, or $6,500 if you’re age 50 or older, and you can do it all through payroll deductions.
Non-retirement investment accounts
Most employees are familiar with the idea of direct depositing their paychecks into their checking accounts. But many employers will allow you to set up direct deposit arrangements into several financial accounts. While this is typically done with retirement plans and checking accounts, you can do the same with other types of accounts.
You can have money direct deposited from your paycheck into one or more savings accounts, or even into non-retirement mutual funds or investment accounts. Much as is the case with 401(k) plans, direct deposits into investment accounts out of your paycheck accumulate automatically, and can build up quickly with limited effort.
You can set up direct deposits with your human resources department. Check out how many accounts they will permit you to direct deposit into, and take advantage of this benefit. It’s a made-to-order provision for non-savers of all types.
Employee stock purchase plan
Employers with publicly traded stock sometimes offer employees the ability to invest directly in their stock through an employee stock purchase plan, commonly known as an ESOP. Though you can often do this through a 401(k) plan, an ESOP will enable you to purchase the stock if the 401(k) plan doesn't allow it, or if you simply want to hold your employer stock outside of your retirement plan.
Under an ESOP, your employer establishes a fund with new shares of its own stock and makes them available for purchase by its employees. The employer can also contribute cash to the plan — which is used to purchase existing shares at a later date — or take out a loan to pay for the stock purchases.
There is usually a vesting period (similar to vesting of the employer matching contribution on a 401(k) plan) of anywhere from 3 to 6 years. If you leave the company after you are fully vested in an ESOP, the plan will buy back your stock at the then fair market value.
ESOPs have important tax benefits. Dividends paid to employees on company stock that is reinvested in the stock are tax-deductible. Contributions to the plan are not taxable. On distribution, the employee has the option of either rolling the ESOP over into an IRA, or paying tax on the distribution at the favorable long-term capital gains tax rate.
Since you already work for the company, you’ll want to minimize your risk by not investing any more than 5% to 10% of your total investment value into company stock.
Even if you’re not a saver by nature, and have a little understanding of investments, you can open up investment accounts through your employer that will enable you to accumulate a large amount of money between now and retirement.
