You may be lucky enough to work for an organization that offers 401(k) or 403(b) retirement plans. This article explores key points to understand about artist retirement plans.
In Southwest Contemporary’s Financial Literacy for Artists series, we bring you financial content that can apply to artists working in any medium and at any career stage.
Over the past three years, Tamara Bates, founder of the fellowship the dots between, has worked with hundreds of artists in the Southwest and across the country. Her articles share information on the core topics she has been asked about and what she learned as a financial advisor. The images in this series are all from previous dots between fellows.
This is the ninth article in a series exploring financial topics pertinent to artists at different career stages. The columns in this series include:
- What You Need to Know as an Emerging Artist
- What Mid-Career Artists Need to Plan For
- What Late-Career Artists Need to Consider
- Basics of Managing Uneven Income
- Protective Factors for Managing Uneven Income
- Aligning Revenue, Time, and Values
- Student Loan Updates
- IRAs Explained
- 401(k) and 403(b) Employer Retirement Plans
- Sandwich Generation Financial Planning and Family Needs
401(k) and 403(b) Employer Retirement Plans
You may be lucky enough to work for an organization that has a retirement plan, like a 401(k) or 403(b). These are called qualified plans, which means they are qualified by the Internal Revenue Service to receive tax-deferred treatment. There are several reasons to participate in these plans if your employer offers them.
I highly encourage you to understand the plan elements and sign up even if you are not totally sure how it all works. Participation is a great way to understand how it can benefit you. I find with most investing topics that it’s often an abstract concept to grasp until you start doing it.
This article explains, in general terms, how you can work with the human resources department and plan advisor to make sure you are taking advantage of what your employer plan may offer.
The Inner Workings of Employer Retirement Plans
Workplaces have variances in how they handle administrative tasks, but generally speaking, the HR person will be the one to explain the basic workings of the plan, enroll you, and give you the paperwork to fill out to authorize how much of your salary will be contributed to the organization’s retirement plan. Sometimes you have to work for an organization for six months before you can start contributing or before an employer matches your contribution. Enroll as soon as you can to start your eligibility for benefits.
Most plans will have an employer match—your workplace may match what you contribute to the plan up to a certain amount. Three or 4 percent of your salary is typical. More than 4 percent is amazing.
To the best of your financial ability, you should contribute at least the amount that the employer matches. This is basically free money coming to you, so take advantage! The standard financial advice is to contribute 10 percent of your salary each year to have enough money saved for your older years. This is hard to do by yourself so an employer match will help get you much closer to that number or even exceed it.
Also, don’t forget this money is coming out of your salary before taxes, meaning you are paying taxes on a smaller amount of money. You may barely notice 1 or 2 percent coming out of your paycheck and going into the plan, but over time and with the employer match, it can add up to a significant amount. Starting small and upping the percentage you are contributing over time is a good way to make sure you have enough to cover your bills and are saving for the future.
If you get a raise, definitely plan on upping the percentage of your salary that you’re contributing.
The HR person is in charge of enrolling you, but it’s the plan advisor who can help you choose investments and answer investment questions once your account is set up. The plan advisor can also help you roll over any previous 401(k) or 403(b) money into your current plan.
I’ve said it before and I’ll say it again: contributing to one bucket of money is better than investing into several smaller buckets. The place where you are moving money to is always a better choice than the place you are taking money from. Ask your new plan advisor for support if you have retirement funds from a former job that you would like to roll into your new plan.
Saguaro music video by Ana Barajas, a fellow for the dots between. Courtesy the artist.
Vesting Schedules
The vesting schedule topic can be confusing. This is the timeline the employer may apply to the money they are contributing on your behalf. The money you contribute to the plan is always yours. However, the money the employer puts in may be subject to a different timeline. Sometimes you have to be at a job for three years to be able to take the entire amount the employer has put in on your behalf when you leave the job.
Usually, the employer money will vest over time; for example, 50 percent may be yours after a year with 75 percent going to you after two years and so on. Find out your job’s vesting schedule—either the HR person or plan advisor should be able to explain this to you.
Even if you plan to stay at a job for fewer than three years or whatever their vesting schedule is, enroll in the plan because the money you put in is yours to take with you.
Conclusion
If you participate in an employer-qualified plan, you can still contribute to a Roth or regular IRA—it’s just not tax deductible. Some plans also have a Roth 401(k) component. Again, ask the plan advisor to explain the options and benefits.
There are other types of qualified plans, like 457 deferred compensation, pensions, and special plans for government employees, but, for now, we won’t go down all of these paths that may not apply to you.
Instead, just remember: if there’s a plan, figure out how it works, enroll as soon as you can, and take advantage of the match. That’s it!
