Investing on the job

One of the best ways to invest for retirement is by being part of an employer’s retirement savings plan — a 401(k), 403(b), 457, or thrift savings plan, depending on where you work. Not all employers offer these plans, but if they do, it makes sense to participate.

Here’s what happens:

1. You sign up as soon as you’re eligible, which may be after you’ve been on the job for a year. You should ask what the rules are.

2. You decide what percentage of your salary you will put in to the plan. Your employer may set a limit, and you can’t add more than the federal government allows (in 2007, that’s $15,500).

3. Check to see if your employer matches some or all of what you contribute. If that’s the case, you’ll want to defer at least the maximum that will be matched. Why? It’s free money. For example, if your employer will match 50% of what you put in, up to 6% of your salary, contributing 6% gets you 9%. Suppose you earn $40,000. You put in 6%, or $92.30 every two weeks, for a total of $2,400 annually. Your employer adds $46.15 for each of your contributions, or $1,200 over the year. All told, $3,600 has gone into your account.

There’s a bonus, too. When your employer reports your annual income to the IRS, the money you deferred to a traditional 401(k) or similar plan isn’t included. That reduces your current tax bill.

Of course, you shouldn’t plan to touch this money until you retire. But it’s portable, so you can move it to a new employer’s plan if the plan accepts rollovers or an individual retirement account (IRA) if you change jobs.