If you participate in a retirement plan at work, consider yourself to be among the more fortunate half of the population. Only 46 percent of employees participated in a workplace retirement plan in 2012, a proportion that has remained relatively consistent since 1979, according to a recent Employee Benefit Research Institute analysis of Census Bureau data. And among these workers with retirement benefits, 78 percent had a 401(k) or similar type of retirement account, compared to 21 percent with a traditional pension.
"A critical component of saving for retirement is the availability and use of an employment-based retirement plan," writes Craig Copeland, a senior research associate at EBRI and author of the report. "Americans with an individual account retirement plan have significantly more wealth, on average, than those without one."
Participating in a retirement plan at work generally allows a worker to take advantage of employer contributions to retirement benefits and get a valuable tax deduction. Income tax won't be due on traditional 401(k) contributions until the money is withdrawn. Workers who aren't offered a retirement plan at work or who can't afford or choose not to participate often miss out on both the employer contributions and tax breaks.
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Some 61 percent of employees work for a company or union that sponsored a retirement plan, but less than half signed up for the benefit, EBRI found. Unsurprisingly, people who are older and who have higher incomes are more likely to utilize retirement benefits. Retirement account participation jumps from 34 percent among 20-somethings to 62 percent of people in their 50s. And while 79 percent of those making $50,000 or more use a retirement plan, only 56 percent of people earning $20,000 to $24,999 are able to.
And even among the workers who participate in a retirement plan at work, they don't always get to take the employer contributions with them if they leave the job. Workers can't permanently keep their retirement benefits until they are vested in the plan. Vesting schedules for 401(k)s generally range from immediate vesting to requirements of five or six years of service before you can keep employer contributions if you leave the firm. Only 43 percent of workers were vested in their retirement benefits in 2012, EBRI found. Those who aren't fully vested could lose part or all of their employer contributions to retirement benefits if they lose or leave their current job.
Employees who don't have access to a 401(k) or similar type of retirement account at work can contribute to an IRA, but the tax-deductible limit for IRA contributions is far lower and there is no employer match. The 401(k) contribution limit is $17,500 in 2013, $12,000 more than the $5,500 workers can contribute to IRAs. The disparity is even greater for workers age 50 and older who are eligible to contribute $23,000 to a 401(k), but only $6,500 to an IRA.
Low income retirement savers may be able to get a tax credit for their retirement account contributions. Those who earn less than $29,500 for singles, $44,250 for heads of household and $59,000 for couples could get a tax credit worth between 10 percent and 50 percent of the amount contributed up to a maximum possible credit of $1,000 for individuals and $2,000 for couples. But most saver's credits are much smaller than the employer match you would get through a 401(k) plan, averaging just $204 for couples in 2010.
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