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Employer-Sponsored Tax-Qualified Retirement Plans

A tax-qualified retirement plan is one of the most valuable employee benefits your employer can offer. With pension and social security benefits combined projected to cover only a portion of your retirement income, you will likely need other sources of income to help you manage your living expenses during retirement.

Many companies offer employer-sponsored retirement plans, but not everyone takes advantage. Some people don’t know what is available, or they feel retirement planning is too complicated or time consuming. As part of strategic financial planning, you should learn about the types of retirement plans your company offers.

Does your company contribute to your plan?

Many employers offer base or matching contributions to employee retirement plans. This is free money. If you contribute enough to qualify for employer contributions, your retirement savings can grow even faster.

Knowing how much you can get from your company can help you maximize your tax-deferred retirement plan—you can build your retirement savings stronger with employer contributions.

Funding your employer-sponsored retirement plan with your current income

When you enroll in a tax-qualified plan such as a 403(b), 401(k) or a 457 Deferred Contribution Plan (DCP), you make pre-tax contributions to your account.

Since your contributions are made pre-tax, you are funding your account with money you already have. Income that would have been taxed can be set aside for your retirement savings.

An employer-sponsored retirement plan helps you save money before you even see your paycheck. In turn, this may help lower your taxable income per paycheck.

Penalties and restrictions on early withdrawals

Congress created tax-qualified retirement plans to help workers save for their retirement. Consequently there are federal restrictions and federal tax penalties on early withdrawals from these retirement plans. (Generally, this is prior to age 59½ for most plans, 70½ for DCP plans. Ten percent penalty does not apply to a DCP).

Experts caution against using retirement savings to pay for a new car, home remodeling or vacations. You may have to pay a 10% early withdrawal penalty. Also, withdrawing or borrowing money from your retirement plan reduces your savings amount—you have less money invested to grow.

Why should you remain invested?

Retirement planning experts recommend that plan participants remain invested for the long-term. This is especially important if your plan is invested in securities. The stock market has historically fluctuated more frequently over shorter time periods. The historical performance of the stock market suggests that you may benefit by staying invested — riding out the market's fluctuations. This is a valid strategy because the stock market historically has tended to rise over the long term. Of course, past performance does not guarantee future results.

As with any tax-qualified retirement investment, you pay income taxes upon withdrawal. Also, there are restrictions and potential penalties involved if you withdraw from your fund early.

How can you avoid the retirement income gap?

The 2010 EBRI Retirement Confidence survey found that only 54% of American employees feel confident that they will have enough savings to live comfortably during retirement.

Retirement-investment experts say that most people depend on their retirement income from three sources: Social Security, the employer's pension plan and personal savings.Social Security replaces about 40% of an average wage earner’s income after retiring according to the Social Security website (www.ssa.gov), and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably.

If the income you will need is greater than what you will likely have, you may have a "retirement income gap." You can avoid this gap by developing a strategic retirement plan.

Your benefits administrator can connect you with a financial advisor whose expertise can help develop the appropriate retirement plan that suits your needs.

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Securities and investment advisory services are offered by VALIC Financial Advisors, Inc., member FINRA, SIPC and an SEC-registered investment advisor.

VALIC represents The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.

This information is general in nature and may be subject to change. Neither VALIC nor its financial advisors or other representatives give legal or tax advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For legal or tax advice concerning your situation, consult your attorney or professional tax advisor.