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Thought Leadership In Action

How to Educate Employees About the Tax Benefits of Saving for Retirement

Boosting participation in your company’s 401(k) plan can help your employees save for retirement and save money on their taxes every year. But sometimes it can be a challenge to get people to enroll and contribute enough to get any match your company might offer.

Plain talk can help educate employees about the tax benefits of saving for retirement, say experts. We asked some to share what human resources departments can do to help employees understand.

What Employees Need to Know

As companies moved from a defined benefit to a defined contribution model of pensions and retirement plans, 401(k)s became a popular model for retirement savings. Designed to be a supplement to retirement savings and not a replacement, the 401(k) is often touted as an employee benefit, whether it comes with or without a company match.

“The most valuable aspects of a 401(k) are the tax flexibility and advantages granted by the IRS for those who choose to participate,” says Jonathan K. Duong, founder and president of Wealth Engineers. “Specifically, the IRS provides you with the ability to choose when you want to be taxed on the income that represents your contributions.”

Highlighting the benefits can make those advantages real to employees. “The government rewards us richly for saving for retirement in a retirement account, particularly if the contribution is tax-deductible,” says Christina Povenmire of CMP Financial Planning. “If you are in the 25% tax bracket, then you will save 25 cents on the dollar by contributing to your company's 401(k),” Povenmire says. “If there is a matching contribution, then the rewards are even sweeter. Ideally employees will contribute enough to at least receive the employer match. But the tax savings alone justifies contributing the maximum amount you can afford.”

"Employees need to remember some benefits depend on income thresholds," says Vincenzo Villamena, managing partner at Online Taxman, a boutique CPA firm specializing in tax preparation for entrepreneurs, U.S. expats and others in special situations. “Lower-income households — individuals earning under $27,000 or married couples filing jointly earning under $55,000 — can use what is known as a ‘savers credit’ for contributing to their IRA or 401(k),” Villamena says. “If an employee makes under a certain threshold — single people at $129,000, married couples filing jointly at $181,000 — then they would also be eligible to contribute to a Roth IRA, which would grow tax-free until retirement and not be taxable upon withdrawal.”

"Whether they choose a Roth IRA or a 401(k), it’s important for employees to remember that their investments are compounding more rapidly than they would in a taxable account," Duong says.

Where You Can Get Help

Ask your benefits administrator if they offer classes, consultants or other guidance to help educate employees on the most effective ways to save for their unique situations. Bringing in experts who can explain benefits clearly can help employees see the advantages of participating in retirement plans and encourage them to participate.

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