A Primer on the Basic Employee Benefits

Financial planner Beau Kemp of Sensible Money describes what you need to know about the basic employee benefits: 401(k), Roth, and HSA.
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by Beau Kemp, CFP

Employer Benefits – Retirement Accounts

Getting your first job, or even a new job, can be intimidating when you receive your employer benefits package. There can be multiple retirement account options and asking yourself these two questions will help you decide which account you should contribute to:

1) What does it mean for my taxes today?

2) What does it mean for my taxes in the future?

Tax-Deferred Accounts

Tax-deferred accounts are the most common retirement accounts employers offer. Some examples are a Traditional 401(k), 403(b), or 457.

Taxes Today: You will receive a tax deduction today for every dollar you contribute to these accounts. For example, if you contribute 10% of your $50,000 salary, your taxable income will decrease by $5,000 this year.

Taxes in the Future: This money will be invested and grow tax-free until you withdraw from this account. 100% of this withdrawal will be taxed as ordinary income in retirement.

Conclusion: You should consider contributing to a tax-deferred account if your tax rate is higher today than it will be in retirement.

Tax-Free Accounts

Tax-free accounts will be Roth accounts (Roth 401k, Roth 403b, etc). Another term you may see describing these accounts are “after-tax” accounts since nothing is free in this world.

Taxes Today: You do not get a tax deduction today when you contribute to a Roth account. So, if you contribute the $5,000 from above to a Roth account, your taxable income will not decrease.

Taxes in the Future: This money will grow tax-free, and 100% of your withdraw in retirement will be tax-free.

Conclusion: You should consider contributing to a Roth account if your tax rate will be higher in retirement compared to what it is today.

Health Savings Account

To be eligible for an HSA, you must be on a high deductible health care plan. This is an investment account used for health-related expenses.

Taxes Today: You will receive a tax deduction for the amount that you contribute (like the tax-deferred account).

Taxes in the Future: You can invest this money and allow it to grow tax-free. Also, when you withdraw this money for health-related expenses, it will be tax-free as well.

Conclusion: Think of this account as a combination of tax-deferred and tax-free accounts. The catch is that this money is for health-related expenses.

Think of your overall financial picture as one big puzzle. Every account has a specific role it should play in both the accumulation and decumulation phase of life. Being diversified in the type of accounts you have will help you have a more tax-efficient retirement.

About the author

Beau Kemp, CFP® is a financial planner at Sensible Money. He started as an intern while finishing his final semester at Northern Arizona University and has enjoyed seeing the impact a financial plan has on a person’s life ever since.