Making Sense of Your Company's Retirement Plan

I meant for this post to be part of the week's series on starting a new job, but I get questions about retirement plans all of the time from people who have had accounts for years. The truth is that most employees feel a little vague at best about the details of their retirement plans. This post will try to break down the basics to help you fit your employer's retirement plan into your planning and, in some cases, raise the questions that might lead your employer to improving the plan itself. So what do you need to know about your retirement account? Read the key points I've given you below and then find whatever qualified plan your employer is offering on the chart at the bottom to gather specific questions you should be asking your employer.

Tax Deferrals

Whatever plan you have, you should know what the big deal is about retirement accounts—it's all in the tax breaks. The majority of "qualified" retirement accounts allow you to put part of your paycheck into the account and deduct that money from the income you list on your tax filing for the year. This is great for two reasons: 1. you pay fewer taxes that year; and 2. the money you were going to put toward taxes can start earning money itself through investments.

You do eventually pay those taxes. When you start taking money out of the account (hopefully in retirement), you will pay a tax on both the money you put in and the extra earnings you take out. In the meantime, though, you should have been able to make a lot more in investment returns thanks to this "loan" of your tax dollars from the government.

More Tax Deferrals

In the case of Roth IRA's, the government offers you a slightly different deal on your taxes. With these accounts you do pay your taxes this year on the money you put in but don't have to pay any taxes while you investment account is earning. Why does this work? As with tax-deductible plans, you can keep reinvesting the money your investments earn year after year without paying the taxes until you take money out. But you also have the benefit of being able to take out that original contribution tax-free (because, of course, you paid the taxes before putting the money in). This works well if you think your income tax rate in retirement will be lower than it is right now. People often use the Roth as a second retirement account to save more than they can under an employer's plan.

Fancy Terms You Should Know

There are a few key words and terms that make all of the difference in understanding retirement plans. Here are some:

Vesting: With some plans the money is yours as soon as it hits your retirement account. You may have to pay a penalty to the IRS for taking it out early, but your employer has no more claim on the money. With other plans, the "ownership" of some or all of the retirement account money does not pass to you until it vests, usually after you've worked a specific number of years for the company.

Qualified Contributions: These are the contributions you and/or your employer make that are tax deferred. All retirement plans have limits on these—often you can add more to your account, but you don't get that tax break after you hit the qualified contribution limit.

Matching: In many plans, your employer has agreed to contribute its own money to your retirement account whenever you do. How much the employer adds depends on the terms of the account, but we usually talk in terms of percentages (does your employer match 100% of your contribution or 50%?) and limits (the employer will stop matching when it reaches a certain amount or percentage of your salary).

Contribution Limits: Every year the IRS announces what the limits will be on how much you can put into retirement accounts and still get those great tax breaks. Here they are for 2015.

The Risks

In the rush to get you to invest in your retirement plan, we in the financial industry often forget to tell you something really important—there is a good reason NOT to contribute. Specifically, it can be extremely expensive to get that money out of your plan if you need it before retirement. You are always going to pay any taxes you did not pay when you contributed, of course. But unless you fall under one of the special exceptions, taking money out of your qualified retirement account early (usually before the age of 59 1/2) will mean paying a 10% penalty to the government. Ouch. Make sure you have some other funds or go-to plan for emergencies before you put yourself in the position of paying extra to get to your own money.

Which Qualified Plan Does Your Employer Offer? (click to enlarge)

Five Do's and Don'ts of Negotiating

Most Americans don't grow up haggling in marketplaces, and that's probably a real disadvantage for us. It means that we tend to go into salary negotiations with the idea that the price and terms are already set before we get there. Occasionally that is true, but with most jobs you should assume there is some room to make the salary, terms or both work better. And getting off to a good start means your career (and your finances) progress that much faster. Here are five quick points for getting the best terms for your new job:

1. Do your research.

Anyone who has tried haggling at a market stall knows that one of the best opening lines is "I could get it for less down the road." In a job negotiation, that concept should translate to something like, "I am really interested in working for your company, but I am not sure that I am willing to take the lower salary that you are offering me." You could bluff, of course, but this strategy plays out much better if you know what compensation ranges look like in your industry and even better, what the people who are already employed with this company are making.

2. Never say "yes" on the spot.

I've made this mistake myself. You are fumbling along in the middle of your day when the phone rings and someone offers you a job right there and then. They throw in a salary number pretty close to what you were hoping for. Assuming you're interested in this job, your instinct is probably to say "yes" right then and there. Don't.

Instead tell the person on the line how excited you are to get the offer and ask for some time to consider your options. If they don't offer up a timeline, ask when they need to have answer. Hang up the phone, have a little spontaneous celebration, and then sit on your answer a bit while you move on to points 3 through 5...

3. It's not about you; it's about them.

I know you have financial needs; you know you have financial needs, but focusing on how much you need (for housing, food, transportation, etc...) takes the negotiation away from the more important topic—how much you are worth to this company. It's alright to throw out the old "I'm going to need X dollars to make this work" line, but otherwise always bring the conversation (and the thoughts in your head!) back to how much the company needs you.

Not usually your style? Focus your thoughts on the company's challenges. Are they struggling to get the job done because they don't have someone with the right skills? Are they hoping for someone who can make the existing team work better? Do they need someone with enough energy to get things started? Your ability to solve these challenges is what they are going to pay for. Highlight that value to yourself and say out loud to them how excited you are to bring those abilities to the new job—but only if they can make it worthwhile, of course.

4. Attack the problem from all angles.

One of the best tricks of talented negotiators is finding those creative ways to get more. Let's say you've already brought up the fact that you'd like a higher salary (and could possibly get a better one from a competitor), only to learn that the company has a policy or a financial constraint that makes the higher salary impossible.

Remember, the person doing the hiring went through a good bit of effort to get to this point with you—she or he has every incentive to find a way to make it work. This is why managers often use perks and benefits beyond salary to sweeten an offer to a good candidate. But you often need to prompt them. Here are some extra perks that often get thrown in to improve a job offer:

• A better job title (even if it doesn't come with more pay, it sets you up for better lateral moves)
• Moving expenses
• More paid leave time (this can be vacation time, sick leave, sabbatical, etc...)
• Allowance or reimbursement for parking or transportation
• Housing subsidy
• Flex time
• Full or partial work from home schedule
• Tuition reimbursement for further education
• Wardrobe allowance
• Signing or sign-on bonus
• Options or performance bonus

Obviously, not all of these will make sense to your job. But at least some of them will. Someone expected to host events probably should have a wardrobe allowance; housing subsidies are used to lure great candidates to more expensive cities; signing or performance-based bonuses are a common way for employers salary level policies; and further education can benefit both you and your boss if you are in the early stages of your career.

What all of these perks have in common is that they either 1. make it easier for you to progress in your career, or 2. allow you to put more of your salary toward you own savings. Some of them do both.

How do you make your move? Keep your tone firm, confident and friendly. Approach the employer with no more than two of these "perks," choosing options that make sense for the job and for the employer: "I understand that the company can't offer more salary, but I would really like the chance to work with you. Would the company commit to at the end of the year if I meet X targets?/ include a wardrobe allowance to help cover the costs of running these events/be willing to offer more vacation time until finances are better?"

5. Get It In Writing

This may be the last item on the list, but that doesn't make it any less important. The employer should be proving you with a written job offer and job description anyway. But make sure they do with a polite request: "I think this is a great offer. I will call you back with a firm answer after I've received the written offer and job description."

There are guarantees that a new job is going to be everything you hoped it would be, but going through a strong negotiation process in the beginning is a great way for both you and the employer to establish a level of professionalism that sets the tone going forward.

Still feeling anxious about asking for more? Remember you aren't just improving your terms; you are proving that you have the confidence and skills to be a successful negotiator for their business.

Getting A Head Start: Tips For Before You Start That New Job

I spend most of my time helping people with investments, but you can't get around the fact that your job is likely the most important part of your financial plan. There are simple things you can do at the very start of a new job that can impact your pay, benefits and working conditions for the rest of your time with your new employer. In fact some studies show that starting off with less pay in that first job could mean less earnings long after you've moved on. If you are on the job market, have an offer on the table or about to start a search, this short series of posts will give you the key points for getting the most, in salary and benefits, out of your new job. Follow along and send in your questions!

1. The Five Biggest Do's and Don'ts of Negotiating

2. Making the Most of Your Retirement Plan

3. Making the Most of Your Health Insurance Plan

4. Protecting Yourself from Employment Risks

And use the comments to send questions or suggestions you want to share.