The earlier you start saving for retirement, the bigger your account may grow over time. That means you might be able to afford more sweet skydiving trips when you finally hit 65. Or whatever activity you might find enjoyable.
In preparation, you may want to open an account explicitly designed for retirement, like an employer-sponsored 401(k). But this raises the question, “Do all employers offer 401(k)s?”
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What is a 401(k)?
A 401(k) is an employer-sponsored retirement account that comes with special tax advantages. The name comes from the section of the U.S. IRS Code that established the plans.
How does a 401(k) work?
When you sign up for a 401(k), you can typically choose between different investments from a set menu. You can also decide how much you want to contribute. The money you put into your 401(k) is not taxed, so it lowers your tax bill for each year you add to the account. The money will be taxed when you take it out of the 401(k), usually after you have retired but no later than when you reach age 72. Be sure to check with a tax professional if you have questions.
After setting up a 401(k), your employer will automatically deduct the percentage or amount from your paycheck that you determined and move it to your retirement account. Some employers even offer payments that encourage you to make that deduction.
Note that your 401(k) benefits vary slightly depending on which type you choose. With a Traditional 401(k), pre-tax contributions mean that you can lower your income tax now and pay taxes later. By contrast, with a Roth 401(k), you’ll pay taxes on your contributions now and enjoy tax-free withdrawals in retirement.
Must a company offer a 401(k) plan?
Employers aren’t required to offer 401(k) plans and when they do it may be because they are offering incentives to attract the most experienced or skilled workers.
Employers may also opt out of 401(k) plans if they don’t have the time or money to hire a firm to create and administer the plan. In particular, many startups and small businesses don’t offer 401(k)s due to the initial startup and ongoing administration costs.
Benefits of an employer 401(k) program
For employees who have the option to participate, 401(k) benefits can be worth the cost.
There are many tax advantages offered by 401(k)s. To start, contributions to Traditional 401(k)s are pre-tax, which lowers your annual taxable income. Your money is tax-free until you reach a certain age or retire, and then you’ll pay taxes on withdrawals.
With Roth 401(k)s, you pay taxes on your money and then invest in your 401(k). Though you don’t lower your annual taxable income now, any growth is tax-free in your account. Then, you won’t have to pay taxes when you make qualified withdrawals when you reach a certain age or retire.
Some employers also match your contributions. For instance, they may contribute up to $3,000 per year to each employee’s account. Or, more commonly, they may match 50 cents to $1 for every dollar you contribute up to a certain percentage of your annual salary.
Decide your contributions
Another perk of 401(k)s is that you can contribute only what you can afford. Plus, you can change your contribution at any time, though you will be subjected to plan restrictions or IRS limitations.
High contribution limits
Both Roth 401(k)s and traditional 401(k)s offer higher contribution limits than other tax-advantaged accounts.
For instance, here are the 2022 tax year contribution amounts:
- Up to $20,500 in either account if you’re under the age of 50
- Up to $27,000 in either account if you’re over the age of 50
- Between $20,500 and $27,000 across both accounts, depending on your age
However, your employer’s contributions won’t count towards this total. For the 2022 tax year, your total 401(k) contributions, which include both your contributions as an employee as well as your employer’s contributions, cannot surpass $61,000. The only exception is if you’re over the age of 50, in which case you can contribute $67,500 in total.
By contrast, individual retirement accounts (IRAs) have a contribution limit of 6,000 for the 2022 tax year. However, if you’re over the age of 50, your limit is $7,000 instead.
You can take it with you
If you open a 401(k) and then change employers, you don’t have to leave the money behind. Instead, you could transfer it into your new account or even roll your 401(k) into an IRA. Be sure to speak to a tax professional to see what the best option would be for you.
Since 401(k) contributions are pulled right from your paycheck, you won’t have a chance to miss (or spend) the money. That makes contributing regularly even easier.
What if my employer does not offer a 401(k) plan?
If you’re self-employed or don’t have access to a 401(k) plan through work, you have other options available.
With an IRA, you can save for retirement and earn some tax benefits too. A Traditional IRA lets you make pre-tax contributions, lower your annual tax bill, and enjoy potential tax-deferred growth, just like a Traditional 401(k). However, you can only contribute $6,000 or $7,000 in 2022.
With a Roth IRA, you pay taxes on your contributions and then make tax-free withdrawals in retirement. Additionally, you can usually withdraw your contributions (not your growth) without taxes or penalties.
But Roth IRAs do have their downsides. To start, you can only contribute $6,000 or $7,000 per year. Additionally, if you earn above a certain limit, you can’t contribute at all.
Diversified investment accounts
A diversified investment account, or brokerage account, helps you build retirement funds without the tax advantages. But you’ll have more freedom to choose and trade investments. You can also chase certain strategies, such as value or growth investing.
Some investment accounts, like the MoneyLion Investment Account, offer extra perks, such as fully-managed portfolios and an auto-investing feature. It’s never been easier to invest in your future using MoneyLion!
Solo 401(k)s are designed for self-employed workers (and spouses) who want the features and benefits of an employer-sponsored plan. These plans carry contribution limits of $61,000 in 2022, plus $6,500 if you’re over 50. You can also choose between Roth or traditional solo 401(k)s.
Do I need a retirement account?
Having a retirement account can help automate your money saving plan. Depending on your specific situation, having a retirement plan can be a good idea so that you will have additional funds each month to use for gas, groceries, living expenses or even vacations. While it’s possible to live off social security benefits alone, you would likely not have extra income for unexpected costs like a home repair, new vehicle, etc.
Do all employers offer 401(k)?
To answer your question, not all employers offer 401(k)s to their employees. But don’t let that stop you! The younger you are, the more you may stand to benefit from investing in a retirement account. So, why not start now?
With a MoneyLion Investment Account, you can invest for any reason like retirement, your dream vacation, or even just a rainy day. Once you open the account, what you do with the money is up to you – we’ll just help manage it on your behalf.
Does an employer have to offer 401(k) to all employees?
Employers don’t have to offer 401(k) plans to all employees as long as they don’t use discriminatory criteria. For example, you may not qualify if you work under 15 hours a week – but you can’t be excluded based on race, gender, or salary.
What can I do instead of a 401(k)?
If you don’t have access to a regular 401(k), you may want to look at Traditional or Roth IRAs, solo 401(k)s, or a regular brokerage account.
Can you open a 401(k) if your employer doesn’t offer it?
The IRS permits self-employed business owners to open solo 401(k)s. However, you can’t open your own 401(k) as an employee.