Fact #1
There is a limit to how much you can contribute. The maximum you can contribute in general is the same. For 2020, the contribution limit is $19,500. What differs is the amount your employer is able to contribute based on the specific plan they offer.

The link below is the IRS site where you can click on the type of employer-sponsored plan you have to see what the limit is to what your employer can contribute to your plan.

Fact#2 Your employer may match your contributions. This is a means of incentivizing employees to save for their retirement. In order to receive a match, you will have to contribute. If you don’t contribute, you are leaving free money on the table. Employer matching is usually capped at a percentage of your salary. For example, 100% of your contributions up to 6% of your salary. On a $50,000/yr salary, your employer would contribute up to $3,000 to your retirement account. You would need to contribute $3,000 to your retirement account in order to take full advantage of your employer’s match.

Fact#3 There is a huge difference between a Roth and traditional employer-sponsored account. A Roth employer-sponsored account, such as a Roth 401k, your contributions go into the account after you have already paid taxes on them. Once you’ve contributed to the Roth account, your money grows tax-free. Once you are 59.5 and have held the account for 5 years, you will be able to withdraw from your Roth account without having to pay taxes. Inversely, in a traditional employer-sponsored account, such as a traditional 401k, your contributions are not taxed at the time contribution. Your tax liability is decreased by the amount you contribute each year. At 59.5 years of age when you are eligible to withdraw money from your 401k, you will be taxed only on what you withdraw.

Fact#4 You may incur fees from withdrawal

We recommend to not draw from your retirement accounts until you are in retirement. We know that some people plan to retire early so it is important to understand how to access your retirement account fund without incurring any additional fees.

There are two basic ways to avoid fees. For a traditional employer-sponsored account you may access your money penalty-free at the age of 59.5. You will only need to pay taxes on the money you withdraw. For a Roth employer-sponsored account you will also need to have held the account for at least 5 years. If you withdraw from your Roth before the age of the account has reached 5 years you will be taxed on the earnings you’ve withdrawn and you may be subject to a 10% early withdrawal penalty. Check out this link for more info:

There is a provision for people who leave their job at the age of 55. They will be able to withdraw from their employer-sponsored retirement account (of the job they left at 55) penalty-free.

Fact#5 employer-sponsored accounts are investment vehicles, not the investment

This is so important to understand that your employer-sponsored retirement account is just an account with tax advantages. It houses your investments. So make sure you know what you’re invested in and how much you are being charged for that investment. The amount you are charged will be expressed as an expense ratio. Check out our video about index funds if you haven’t already to understand this more. A lot of employers automatically enroll their employees into target-date funds which are a mix of stocks, bonds, and sometimes cash. The ratio of this mix changes based on your age. This may a good option but it also may come with a substantial expense ratio. From the advice of Warren Buffet and many FIRE index investors and the research we’ve done we’ve decided to sell our target-date funds and invest in the S&P 500 index offered by the brokerage our retirement accounts are housed with the lowest expense ratio. For us, it is the FXIAX which is fidelities s&p 500 index which through fidelity it has an expense ratio of .015%. Check with your benefits department to find out how you can access this information, so you can see which index fund may be best for you!

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