Since this has been one of my most requested video topics, I’ll be discussing exactly what a 401k is, why you should (or shouldn’t) contribute to it, and several of the pros/cons of this retirement account. While it does allow you to invest up to $18,000 per year of pre-tax money, reducing your taxable income and potentially saving you thousands, it may come at a cost depending on your situation and it’s important to take everything into consideration. Feel free to add me on snapchat / Instagram: GPStephan
What does a 401k do: It allows you to invest with pre-tax money so you have a larger amount upfront to invest with. You can contribute up to $18,000 per year to this account, or $24,000 per year if you’re over the age of 50. The way it works is pretty straight forward - the money you contribute to a 401k is not taxed right now, but instead it’s taxed when you reach retirement age of 59.5 - when hopefully you’re in a lower tax bracket than you are right now, so you end up profiting the difference from what you would’ve paid in taxes NOW, and the lower rate in the future (hopefully).
The biggest advantage here is that you have pre-tax money working for you. That $4500 you would’ve paid, for instance, can be invested and grow to a substantial amount when you’re much older.
If you’re employed right now, you can check and see if your employer has a 401k plan - if they do, speak with your employer and go ahead and you can begin contributing to it. Sometimes your employer will offer you a FREE match up to a certain amount - this is pretty much just free money, so you should go ahead and contribute up to the match.
If you’re self employed, you have the benefit of opening up a SEP / SOLO 401K - this is a 401k plan that you can contribute to as both the employer and the employee, allowing you to contribute up to $54,000 of income.
If you’re not employed, don’t worry about it - but consider making some money and opening up the IRA account.
Generally speaking, a 401k makes the most sense if you’re making a lot of money right now and intend to retire in a lower tax bracket. This means you pay less taxes right now, and then when you retire in a lower tax bracket, you profit the difference from what you pay today and the lower amount you’ll pay in the future. You also have MUCH more money working for you right off the bat than if you went with a Roth account, which is done with after-tax money. But chances are, if you’re young and expect to continue to earn a lot more money into the future and in retirement, do your research most likely a Roth IRA is going to be a slightly better choice.
However, unlike a Roth IRA where you can withdraw your contributions without penalty…in a 401k, you must leave your money in there. If you take it out, it’s subject to taxes and a 10% penalty unless under specific circumstance - so I recommend just leaving it in there.
Now, lets discuss a few downsides I personally see with the 401k option.
1. Lack of liquidity. You tie up your money long term.
2. Your employer plan could have really high fees. Seriously, if your employer has a plan that charges something like 2% per year, that could dramatically reduce your returns.
3. There’s a chance you retire in a higher tax bracket. That’s one of my biggest worries for myself personally, is that even though I’m earning a lot right now, I have no intention of this decreasing during retirement - I actually want to make more money when I retire.
4. Your money is subject to market risk. This is pretty much unavoidable, but there is risk - and i’ll cover this risk in future videos.
Personally, I recommend doing a little bit of everything - I have a Roth IRA account and a 401k, so I contribute to both just to give me more options. No one really knows what the future will hold and what taxes will be like in 40 years, so doing a little bit of both hedges your bet and gives you a bit of a safety net. With this said, this video is just meant to be an introduction to a 401k and its options so you could continue to do your research and determine what’s right for you!
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
What does a 401k do: It allows you to invest with pre-tax money so you have a larger amount upfront to invest with. You can contribute up to $18,000 per year to this account, or $24,000 per year if you’re over the age of 50. The way it works is pretty straight forward - the money you contribute to a 401k is not taxed right now, but instead it’s taxed when you reach retirement age of 59.5 - when hopefully you’re in a lower tax bracket than you are right now, so you end up profiting the difference from what you would’ve paid in taxes NOW, and the lower rate in the future (hopefully).
The biggest advantage here is that you have pre-tax money working for you. That $4500 you would’ve paid, for instance, can be invested and grow to a substantial amount when you’re much older.
If you’re employed right now, you can check and see if your employer has a 401k plan - if they do, speak with your employer and go ahead and you can begin contributing to it. Sometimes your employer will offer you a FREE match up to a certain amount - this is pretty much just free money, so you should go ahead and contribute up to the match.
If you’re self employed, you have the benefit of opening up a SEP / SOLO 401K - this is a 401k plan that you can contribute to as both the employer and the employee, allowing you to contribute up to $54,000 of income.
If you’re not employed, don’t worry about it - but consider making some money and opening up the IRA account.
Generally speaking, a 401k makes the most sense if you’re making a lot of money right now and intend to retire in a lower tax bracket. This means you pay less taxes right now, and then when you retire in a lower tax bracket, you profit the difference from what you pay today and the lower amount you’ll pay in the future. You also have MUCH more money working for you right off the bat than if you went with a Roth account, which is done with after-tax money. But chances are, if you’re young and expect to continue to earn a lot more money into the future and in retirement, do your research most likely a Roth IRA is going to be a slightly better choice.
However, unlike a Roth IRA where you can withdraw your contributions without penalty…in a 401k, you must leave your money in there. If you take it out, it’s subject to taxes and a 10% penalty unless under specific circumstance - so I recommend just leaving it in there.
Now, lets discuss a few downsides I personally see with the 401k option.
1. Lack of liquidity. You tie up your money long term.
2. Your employer plan could have really high fees. Seriously, if your employer has a plan that charges something like 2% per year, that could dramatically reduce your returns.
3. There’s a chance you retire in a higher tax bracket. That’s one of my biggest worries for myself personally, is that even though I’m earning a lot right now, I have no intention of this decreasing during retirement - I actually want to make more money when I retire.
4. Your money is subject to market risk. This is pretty much unavoidable, but there is risk - and i’ll cover this risk in future videos.
Personally, I recommend doing a little bit of everything - I have a Roth IRA account and a 401k, so I contribute to both just to give me more options. No one really knows what the future will hold and what taxes will be like in 40 years, so doing a little bit of both hedges your bet and gives you a bit of a safety net. With this said, this video is just meant to be an introduction to a 401k and its options so you could continue to do your research and determine what’s right for you!
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
We have enployer match in México, we call it ahorro, Translates to savings. It really is free money because they use that money to invest themselves.
Great explanation.
@graham do you ever age? You look the same now in 2022 that did back then. Other than you gained some muscles !
I love how “Dang” is the background for this video intro. Thanks man
Can you do a vid for the difference between 401k and 403b please? My employer offers both! And hubs is only offered 403b through his employer.
Y'all probably need to learn about a Solo 401K for the self employed. Waaaay better than an IRA – even a Roth!
Could you go over HSA tax advantage accounts? I've heard they actually beat 401K and IRAs if you have the option to use one
Mac Miller background music nice choice
Wait theres a limit? I thought you could put 100% of your income in it lol
To those who are watching this, be familiar with the term “fully vested after X years.” This means that the employers contributions are yours after X years. Should you leave before that time, the employer has a right to pull out the contributions they’ve made. Always read your benefits package before signing a contract with an employer, this way you’re prepared and know what you’re receiving. If you don’t understand, search it up. Ask a friend. Let’s go, guys.
Really miss the format of your earlier videos. Your new ones are way too annoying to watch.
Knowing about these tools growing up would have been nice.
Wow. It’s weird to go back and see Graham just starting out in his Youtube career with no T-Rex head in the video or anything. It’s like night and day how much more confidence he has doing his videos now.
Do you have any opinion on 403B plans? When you explain it its simplified and I feel like I understand it better.
What is the best option if I am let go by that company though? Leaving it with them, rolloing over to a individual ira or roth? The one with them is a 410k matching, but i no longer get paid by them so does the match work for the VANG TARGET RET 2055 or will it no longer be matched and is best to rollover?
I’ve been doing Roth 401k up until now. If I switch to regular 401k will the Roth portion that I’ve earned so far be taxed in the future?
I have a 401k with an employer match and also trying to build my market portfolio. I’m mainly invested in a couple dIvidend ETFs heavily just took on an s&p index fund. Would you also suggest Roth IRA? Or continue to contribute to my portfolio ?
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Thank you Graham 😊!!! Great info !
I'm going back to learn from your older videos !
He needs to develop a personal finance and investing curriculum for high school. I needed this info in school.
I need an opinion Graham. I am recently hearing a lot about over funded whole life policies as a vehicle for savings,personal bank, secured interest rates, ect. For every person who thinks this is the way to go someone says it's a scam. I really can't tell. Do you have a video on this? Thanks
Why on earth does anyone think they will have lower taxes 20 or 30 years from now?
funny story. my grandmother, when she was young, worked as an secretary and i guess the employer was doing a 401k or something like that. forgot about it and lived her life and out of the blue got a call from her old employer who was trying to hunt her down to award her with the savings. Practically over night she went from and ailing old woman retired in the middle of no where living alone barely able to buy oil for heating to living rather comfortably in her retirement. Don't over look saving and above all don't excuse yourself saying "i am young and don't need to".