In this video, I will go over what’s a 401K and how it works, l take you inside my 401K account and show you how to pick investments for your 401K.
A 401k is an employer sponsored retirement account, to be used during retirement starting at age 60. It allows employees to contribute up to 50 percent of their salary toward investments such as bonds and mutual funds. These investments, if invested properly, will grow tax free over time, allowing the employees to withdraw the money to use by the time they are 60.
Here are 6 key things to know about the 401K.
1. The contribution is automatically taken out of your paycheck and deposited into the account for investing. You can contribute up to 19,500 dollars annually. This is a great way to automate your investment because money will automatically be taken out of your paycheck and invested on a weekly or bi-weekly basis (depending on how often you get paid) before it gets deposited into your bank account.
2. Most employers offer some sort of match, whether it is dollar for dollar or 50 cents on the dollar, up to a certain percentage of your salary (typically up to 5%). Some employers such as mine match up to a fixed amount. Bottom line: Always take the match because it’s free money! Nothing can beat that.
3. There are two types of 401K: Traditional 401K and Roth 401K. Traditional 401K is investing with your pre-tax money. Hence, this lowers your total taxable income for the year, which means paying less tax to Uncle Sam. Say you make $60,000 per year and you contribute up to the max of 19,500. Instead of paying tax on $60,000, you will only pay tax on $40,500, a tax saving of about $4400 per year. However, you will pay tax on the money you withdraw at age 60. On the other hand, for Roth 401K, the contribution will be made with post-tax money. Hence there is no tax deduction and it won’t lower your total taxable income for the year, but the money you withdraw at 60 will be tax free. So if your portfolio grows to $1M in the Roth 401K over 30 years and you plan to withdraw all of it, you pay nothing in tax. If you were to withdraw that $1M in a Traditional 401K, you are looking at a huge 300K to 400K tax bill depending on the state you live in.
4. Your investment choices are limited. You are only limited to certain mutual funds and bonds made available by your employer, typically 20 something compared to more than 3500 on the open market.
5. You can borrow from your 401K and have up to 5 years to repay it, but you need to repay everything right away if you leave the company. I would only use this as a last resort to deal with big financial emergencies or to avoid bankruptcy because it defeats the purpose of wealth building.
6. Last by not least, when you leave your company, you can rollover your Traditional 401K into an IRA account and your Roth 401K into a Roth IRA. I did this when I left my previous company 5 years ago. By doing this, you expand your investment choices from 20 something to more than 3500 on the market. This can potentially save you a ten of thousands of dollars because you may be able to find mutual funds with lower expense ratio or management fee on the open market.
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#401K #Investing401 #StockPortfolio
DISCLAIMER: I am not a financial advisor. The content on this video is purely for entertainment purposes only. You are responsible for your own investing and financial decisions.
