The 411 On Your 401k

What is up? Welcome to the podcast. Today's episode we are going to be talking all about one of the most commonly utilized accounts when it comes to planning for retirement. That's right, we are talking all about a 401k account. Today I wanted to do an episode specifically about a 401k account because this is again the first place most people start their journey. This was the very first place I started investing for retirement. This account allowed me to hit $100,000 invested over a seven year time fr specifically by utilizing a quite lazy investment strategy called automate it, set it and forget it. And I think it is a powerful tool. But I know when I started utilizing it I had a lot of questions about a 401k account. So I am going to answer some of the questions I had when I was getting introduced to what the heck a 401k account was, questions that clients have had and just kind of give you some solid bullet points to think about when you are either looking at your account, looking at setting one up, want to do an assessment on if you know you have it structured in a way that makes sense for you and yeah, just give you some, some key takeaways. It's not going to be like the most comprehensive answer every little itty bitty question about a 401k, but we are going to talk about some key points that hopefully help provide some clarity for you. So we are going to be diving into the history of 401k accounts and how they came to be, how much you can invest in them, how much you should be investing in them, the differences between a traditional and a Roth 401k account, what to look out for when you are investing in these different accounts, what to do with your 401k when you leave a job, and then busting a major myth about 401k accounts. So let's get into it. But before we do, I just want to add in again that this episode is for the purpose of education. I am not a licensed financial advisor and this is not financial advice advice. Okay, now that we've got that out of the way, let's go ahead and dive in and bring you the 411 on your 401k. This is busy Getting Better, the podcast for women who are committed to prioritizing their own personal growth. I'm your host, Madison J. A mindset and money coach, a first generation wealth builder and a woman on a mission to help you master your finances and live your best life. Money is not all we are covering though. Because in order to live your best life, you have to become your best self. So we are div deep into all things personal development and bringing you the mindset, shifts, money, tips and inspiration. You need to go out there, be bold, and build the life you can't stop daydreaming about. It's time to get busy, babe. Busy getting better. Okay, I thought a really fun place to start would be talking about the history of the 401k plan. And yes, I understand that me saying the fun place to start is the history of a 401k plan, but I promise you, it really is interesting. So hang with me here as I talk a little bit about this because 401ks have not been around that long. They've only been being utilized since the 80s. So pre 401k, what did retirement look like? What did planning for retirement look like for previous generations? Well, employees leaned on something called pension plans. Pension plans were put in place by corporations because they really wanted to instill longevity with their employees. So think back to pre 80s. Primarily. A lot of the work that was being done was like factory workers and people working in assembly lines. And what was happening is that employees would leave companies often and they would have high employee turnover, which meant that these companies were having to retrain new employees on how to do the work. And when people are learning and they are in training mode and they aren't fully up to speed speed on how to do the work, they're not as efficient. And so these production based companies weren't able to produce at the level that they could if they consistently just kept employees employed for longer durations of time and essentially lowered employee attrition, meaning that they weren't having to constantly train new employees all the time. So what they did is they were like, oh, this is genius. We're going to go ahead and put something in called a pension plan. Which essentially means if you give our company loyalty and you come and work for us for the next 30 years, after your 30 years are done, then we will continue to pay you the same wage until you die. And then when you die, we will continue to pay your spouse half the amount of wage until they die. That was a crazy concept back then. So these employees were like, okay, so you're telling me I just need to work here for the next 30 years and then I can stop working, I can retire, and you'll continue to pay me the same amount of money that I've been making my entire life. Meaning that it would be really, really easy to plan for retirement, because you would have been living with the same expenses and the same income the entire time. Well, employers put this in place thinking that they might extend the longevity of their employees longer than they were currently getting, maybe from like two years to seven years. But what they didn't anticipate is that everyone actually stuck around for 30 frickin years banking on these pension plans. What this did to companies is after the 30 years was up, now they were responsible for paying for the employee that was working there for the last 30 years, the same amount that they've been paying them, and also now paying for employees that are actually doing the work. Meaning that these companies were now doubling their books when it came to worker expenses. And that obviously ate in a lot to revenue. So pension plans did not really end up panning out the exact way that these employers had thought that it was going to. And they eventually had to phase them out because they weren't as profitable, the business wasn't making money in the same way because they're paying for two workers when only one workers on the floor doing the fricking work. And so what happened was they started to phase out of pension plans and they started to utilize 401k accounts for what they did in the 80s was implement a new tax law which was a line in the IRS tax code called the 401k line. It actually was not meant to be utilized as a retirement account. When this law was put into place. It was meant to help people essentially defer some of their money into these tax accounts, but it wasn't stood up as a retirement account. But when this line got added into the IRS tax code, someone came in and viewed it as a way, okay, hey, employees can actually utilize this to defer some of their money into these accounts so that they can help with taxes and also, hey, they can utilize this money later in life for retirement. Thus was born the 401k retirement plan. What I think is really interesting about this is during this time frame, the concept of planning for retirement and the responsibility of planning for retirement really shifted from the employer to the employee. Meaning that it was now on you to make sure that you were putting money away and, and you were planning for retirement so that when the day came that you were no longer working, you had enough funds saved up in there that you could live off of. But pre having access to a 401k, which really came in about in 1980, the entire responsibility of retirement and planning for it was more in the employer hands. So this shift totally put all the responsibility on you as an employee to understand what retirement is, how to plan for it, how to utilize these different tools and how to know how the heck you should be actually investing. Like how much money should you putting in there, how much money should you be having in your retirement accounts to make sure that you can continue to live life? It's not something that has really been around for that long. And so I know when we think about, you know, our parents and our grandparents generation, like these aren't tools that they had access to. These aren't things that were necessarily being touted as much. Right. Again, it's only been around since the 80s, so it's not something that's been around for forever. It is definitely a newer account, but I just found that really interesting that pre 401k plans, there was a reliance on pension plans which were again something that the employer was providing to you as an employee. And then all of a sudden for a 1k came into existence, which again was not intended for retirement, but is now utilized as one of the highest retirement accounts. And now that responsibility has shifted to you and I to be able to understand how to utilize these accounts to our benefit. So yeah, just a little brief history there that I found really interesting. Now the 401k account is one of the most commonly utilized retirement accounts, but again, a lot of people still don't really understand how it works and what they should be focusing on. So what I want to share with this is that there are a few stats that I pulled that I also found interesting. One of them being that 68% of American workers have access to retirement plans, but only half of the Americans actually took advantage of one. I also want to make a mess mention that while I'm going to utilize the term 401k, you may also have access to something called a 403B or a 457B which essentially is the similar, similar tool and a similar account. It just depends on like what industry, what sector you work in, which one you might have access to. So really interesting to note that a lot of people are not necessarily utilizing them. And while there's plenty of other tools and other plans that you could have for retirement, there are some benefits of utilizing a 401k. So I want to talk about how much you can be investing in your 401k account and I also want to talk about how much you should be investing in your 401k account. So first up, how much can you invest? You can invest in 2024 up to $23,000 in your 401k account for each calendar year. So that's the max that you can be putting into your account. So if you are saying you, you know, your goal is to max out your 401k account, essentially what you're saying is that you are going to contribute $23,000 a year into that account. Now, if you're like me and you're like, okay, that's great, let me break it down even further so I can actually understand what does that look like on a monthly or a weekly basis to see, like, what would you actually need to be contributing and in order to max out your 401k in a year? So on a monthly perspective, you would be looking at contributing 19, $17 a month in order to hit that. If you were to break that up over 12 payments, or if you get paid weekly and you want to look at it from a weekly perspective, that would be $442 every single week that you can contribute into your 401k account and max it out for a total of $23,000 a year. Now, depending on how much money you make, depending on where you're at in your journey, you might be like, holy shit, that's a lot of money. And maybe it is for you. So if that is, then don't necessarily stress about how do I contribute all of it. Set a goal that feels like a stretch and feels like something that you can work towards and start there, start small. But what I will say is there's definitely a number you should at least try and be contributing to, and that is going to be the equivalent of whatever your company employee matches. So the first thing that you want to do is figure out, does your company offer an employee match? An employee match essentially says, okay, if you as the employee, go and contribute $1,000 to your 401k, we will match $1,000. So that means if you contribute the full $23,000, you will essentially have gotten $24,000 put into your 401k account with that thousand dollars not going towards the contribution amount and also not coming out of your pocket. So we like to call this free money, meaning that you should at least have set a goal to contribute up to the match of your employer, because again, they are going to put in whatever you put in. Now, if your company promises to match up to $1,000 and you put in zero, you get zero of that money. So you actually have to go in and put in however much you want to contribute and figure out what they're willing to match. So companies will either match a certain amount, they will likely match like a certain percentage of your salary up to a certain amount of money. So go and search in your portal, wherever your employees are, ask your HR person, ask a friend, ask a co worker, figure out what the heck your 401k match protocol is and then see if you can afford to at least match up to that. Because then again, right, it's really, it's essentially just free money. So when we're talking about kind of order of importance when it comes to Investing, the 401k employee match program is the very first thing that you should be looking at when it comes to starting your investment journey and your retirement planning journey. So figure out what that matches and see what you can do to try and hit it this year. Again, if are just starting out, that is the best place to start. Don't get stressed out or overwhelmed and be like, oh my God, $23,000 is just way out of what I can accomplish. So there's no point in getting started. Not true at all. The best place to start for you is going to be figuring out how you can hit that employee match. And again, let's think about it as okay, so say your employee matches up to. Let's say you have a generous employer and you can get up to $3000. So if you were to divide that by 12 months, now we're talking 250amonth in order for you to put in $3000, your employer to put in $3000 and for you to be sitting pretty at the end of the year with $6,000 in your retirement account. So it can add up super, super quick. So don't sleep on the employee match program. Make sure that you go figure out what your company offers and set a plan in place to at least hit that. That would be a major win and a major first step for you if you are looking at utilizing this. Obviously if you are already hitting your match and you're wanting to understand what's next, I'll say typical advice is going to be hit your employer match, move on to your ira, your individual Retirement account, which is going to be an episode for another day and then come back and see if you can also continue to max out your 401k. But again, best place to start, at least hitting that employer match, that's what you quote, unquote should be investing up to at least. Now another thing I want to hit on here is how you should be investing it, either into a Traditional or a Roth account? Because I know this is something that can feel very confusing. And transparently, when I was starting to set up my stuff, I had no idea what the difference was between a Traditional and a Roth. And not knowing which one to pick hindered me from picking one. Like, I felt like I was gonna pick the wrong one or I was gonna screw something up. And I just didn't wanna seem silly for picking the wrong account. So let me just kick this section off by saying if you are already invested in one and you picked up the Traditional or the Roth, congrats, like, you made it. You made it past a big hurdle and there's not really a wrong answer here. Like, the right answer is just to start your investment journey. And then there is additional strategies between Traditional or Roth. So I'm going to talk about what the differences are, but don't feel like you messed up. If you picked the wrong one. You can always go in and change it. Again, there are benefits to both of them and both of them are a gold star. So good for you. But if you are like me and you're kind of like, shoot, I really want to know which one would be best for me. Let's talk about it. So a traditional and a Roth account, the difference is really just when you're going to pay taxes on the money that you're investing into those accounts. That's literally the difference. So in a traditional account, you're going to put money into that account and you are going to say, I choose to pay taxes on that money in retirement when I pull it out. The benefit of utilizing a traditional account is that you are saying, let's say you invested $20,000 in your 401k account this year and you're saying, I would rather pay taxes on that money later. Meaning for the sake of easy math here, if you made $100,000 this year, you invested $20,000 into your traditional 401k account, you are only going to pay taxes this year on $80,000 of it. So you're essentially deferring when you're paying taxes on that money to a later date. So if you are someone that is a high income earner and you are looking for ways to save money on taxes this year, then looking at a traditional account could be something that would be beneficial for you. What I will say is that most people lean on Roth accounts for the purpose of being able to pay taxes on that money this year, but letting that money grow tax free. So in a Roth account, it will not impact Your taxable income. So if you. Again, same analogy here. If you made $100,000, you put $20,000 into the Roth account, you are still going to pay taxes on the $100,000 this year, but that money is now going to grow tax free in your Roth account, meaning that when you hit retirement, when you go to pull it out, that money has grown and compounded tax free. And you can now pull it out tax free. A big benefit. As to why people like this is because it's easier to plan for. We don't know what taxes are going to be 20, 30, 40 years from now, depending on when you hit that retirement age. So it's kind of a gamble of like, well, are they going to be significantly higher? Are they going to be the same? Are they going to be lower? I will just mention that taxes continue to go up most times a year over year. So the likelihood that taxes are going to be higher decades from now is pretty high. And so when we factor that in and not knowing what taxes are going to look like back then, a lot of people prefer to pay for taxes now and not have to worry about it later. So Roth accounts across the board are going to be widely utilized and preferred when it comes to wealth building and planning for retirement. Because again, taxes are going to be the highest thing we are ever going to pay money on in our lifetime. And it's, it's, yeah, just typically a better approach to just worry about it now. Pay for the taxes, let everything grow tax free, and then you have all your money sitting in a Roth account and it is compounding and growing completely tax free. So those are the pros and cons. Again, you did nothing wrong if you picked one over the other. Just go and see where you're at and see which one makes the most sense for you. Yeah, and I will just leave it at that. But just knowing that your money can grow tax free in a Roth account and you can plan so much better and then pull it out tax free, really, really great option. So go and see if you have access to both which one you're currently in. If you want to make changes, go for it there. But that is essentially, literally the main difference between a traditional and a Roth account is when the heck you're going to pay taxes on the money that you contribute into that account. That's it. That's all you need to know on it. Okay. Once you've got the money invested in the account, there are a couple things to look out for. Once it's in the 401k account, one of the things is going to be what it is invested in and the other thing is going to be the fees that are attached to it. So typically most employer 401k accounts are going to auto enroll you into something that is called a target date fund, which is essentially a fund that is going to adjust over time based on risk tolerance as you get closer and closer to retirement age. So the younger that you are, you are going to, you know, maybe be invested in more growth stocks and then later in life it might pivot to some more bond focused things in order to adjust for your risk tolerance. So that's typically what most 401k accounts are auto enrolled in is a target date fund. And the target date fund is based on the year that you are projected to hit retirement age. So there's a bunch of these in there that again are just based off of what year you are going to hit 65. And so you want to look at this and see if that's something that you feel comfortable in. I think it's a really great place to start. And if that's where you feel comfortable leaving it in a target date fund, by all means great. If you want to feel a little bit riskier, if you want to be in control of What's in your 401k account, you can look at what some of the other options are in there. I will say that 401k accounts have very limited options for what you can invest in and they typically have higher fees attached to them. So you really want to pay attention to what you're picking. But you could look in there and see if there are other index funds, if there are other things in there that might track the S&P 500. There might be growth stock funds in there. There might just be like other things that you can play around with that you can invest in. So I didn't know this for a really long time that I could not be invested in the target date fund until I actually got in there and started looking around and seeing what the options are. But again, what you also really want to pay attention to is the fees in your 401k account. So you are going to have fees associated with the different funds, with the different index funds that you pick, depending on how risky they are, depending on if they are actively or passively managed. So you want to make sure that you're looking at historical returns, but you also want to look at all of the fees that are associated with it. So sometimes it can get really exciting. To see something in there that has high, high returns. But you also want to look at the or the fees that are associated with it. And you essentially want to try and pick ideally something that's going to track like the S&P 500 or pick different growth stocks that have very, very low expense ratios. So that is the objective really across any accounts that you are investing in. The main thing that you want to look at is the lowest ratio expense ratios. And really index funds that track The S&P 500 are going to be a really, really safe bet because they've got historical returns that really prove what you are likely to get in the future. Obviously past performance does not indicate future prediction, but it really is the best bet that we have to go off of. So just know that you can play around in your 401k account and either leave it in a target date fund or you can look at some different options. But just know that fees in 401k accounts are pretty high. And I came across some interesting information that I just want to share as well as it relates to fees and some interesting stats. So 7 out of 10 people believe that they are paying no fees in their 401k plan and 92% of people have no idea how much they are paying. So if that is you, obviously you are not alone. If you did not know that you were paying fees in your 401k plan and if you have no idea how much you are paying, again, 92% of people have no idea what they're paying. So important note for you to go in and take a look and really get a good understanding of what the heck is going on in there. Know that if you are paying a financial advisor to manage your 401k, you are going to have additional fees. Usually they take a 1% fee of your account. And what I'll say on fees is they might sound super, super small, but they add up over time because fees compound just like your money is. And so you really want to take a look in there and make sure that you are paying the smallest amount of fees possible for whatever you are invested in. And also making sure that you are not paying a financial advisor 1% fees for them to then go take your funds and you know, invest in things that incur even higher fees. So this is something that you really do want to pay attention to. Unfortunately, fees have the potential to eat away at over a third third of your investments over the lifetime of your investor timeline. So although 1% might sound super small, I just encourage you to look at it and recognize that unfortunately it's not that small and it really does eat away. So fees are something that you really want to take seriously and you want to make sure that you understand what you are invested in and what your post fee returns are on, what you are invested in. So just some things to think about there and really, really take a look at. If you are working with a financial advisor or just call your 401k company, have someone really break down for you, hey, what are all the fees that I'm paying and what do my returns look like? Post fees? Because what people might do is try and, you know, beat the market and invest in things like mutual funds with the intention of beating the market. But after all of the taxes that are incurred, after all the fees that are taken on after your 1% feed your financial advisor, you might actually not be making more than or you might not be making as much as you thought you would. So just something to think about and really take a look at again. Right? The fees can eat away at a large portion. So it's just really important for me to reiterate the fact that you should absolutely know what's going on in your account. You are smart enough to figure this out. You are absolutely smart enough to understand what's going on in there. And I just don't want you to fall into the trap of thinking like you can't understand this and that you automatically should just pass your funds off to somebody else and bank on there being enough money for you there in retirement. Like actually get in the sea of your finances and of your retirement plan and know what you're invested in, know what your options are and just feel really, really good about where your money's going. And if you are paying fees, feeling really, really good about what the investment strategy is there and what you are getting in return for it. Okay, that is all I'm going to say on that. On today's episode, let's talk about what to do with your 401k when you leave a job. Because I know this is a question a lot of people have. This is a question I had as I just left my job and I was like, what the heck do I do with this thing now? So really quickly, let's talk about what your options are when you leave your current employer number one option for you. If you are leaving a corporate world and you are moving to another corporate job, you can easily move and roll over your 401k fund to your new employer's 401k. If you are leaving the corporate world and you are moving into entrepreneurship, you could roll your 401k over into a solo 401k. That could be another option you could look at. You could also leave your 401k exactly where it's at. But that's definitely the least advised option. I'll just say because again, fees are really, really big when it comes to 401ks. And if you are leaving it in an employee sponsored 401k from an employer that you are no longer sponsored by, you are likely going to have higher fees. So leaving it in your old plan likely is not going to be the most feasible option for you. So I would definitely recommend moving it somewhere. So again, either into a new 401k plan or what you can do is you can roll over your 401k into an IRA into an individual retirement account, which is another tax retirement account, but it's not sponsored by an employee. It is just something you can open up on your own at home super easily. So I took the route of moving my 401k into my IRA accounts. I had about half of my 401k fund in a traditional account and half of my 401k funds in a Roth account. So when I initiated the transaction, just so you can get an idea of what it looked like, and by the way, it was so, so simple and it took such little amount of time. So I reached out to my old 401k company and I asked them to move the funds for me over to an IRA account that I already had established. And the traditional funds were going to move over to a traditional IRA and the Roth funds were going to move over to a Roth ira. So I have both already set up with another company and essentially I just submitted a request in a form for them to move over the funds transferred from my 401k account to my IRA account as cash. You do not pay any sort of capital gains tax. You do not pay any sort of like fees as it relates to buying and selling stocks if you are transferring within retirement accounts. So that's really, really good to know too. So if you're moving your 401k account over to your IRA account, it's going to transfer over in cash. The only fees I paid were like a $50 transfer fee per account and then maybe like a closing fee. Like I think I paid maybe 150 or $200 in fees total. But that wasn't related to buying and selling of stocks. Right. So you're not Realizing any sort of gains you're not cashing out, you're not paying any sort of taxes or anything. Since it's moving from retirement account to a retirement account, there were no additional taxes, fees, anything like that. So it just moved on over to my IRA account as cash for you to then go reinvest. The benefit of moving it over into an IRA account is that you're just going to have a lot more options to invest in other than keeping it in an employee sponsored 401k account. You can invest in things again. Right. We Talked about the 401k accounts don't have a lot of options and there's typically high fees for the limited amount of options they do provide for you to invest in. So moving it to an IRA account just opens up the door. You can now go and invest in any index fund that you want. You can invest in individual stocks if you would like to. Although I really recommend especially in retirement accounts focusing on index funds, they're significantly more reliable. But yeah, it just opens up the door for you in order to be able to go invest in whatever you want and you're controlling it. So just know that that is typically the option that you can take that is going to be the easiest for you and give you the most control over your funds. I just want to add there, it moves over in cash, meaning that you have to go into pick the retirement or go and pick the stocks or pick the index funds that you want to invest in. You can't just leave it there. Otherwise it's just literally cashed in an account, which is obviously right. Very different. When you invest in a 401k account, usually the employer will automatically enroll you in that target date fund. In an IRA account, it's all up to you to go invest in index funds. So I just want to add that because nothing is sadder than having someone have all this cash sitting in their IRA account thinking that it's invested when really it's just sitting there collecting dust, which is not what we want for you. So if you do go that route, make sure you know to invest it yourself once it's over there. Okay. And lastly, I want to bust a major myth about 401k accounts and that is that you have absolutely no access to them until you retire. Now, while that is the recommended path, you definitely don't want to put money into your retirement accounts that you were thinking you might want to have access to. Obviously life lives. So I want to talk about three ways that you can get access to your 401k funds before retirement. One is going to just simply be an early withdrawal. So you can go ahead and withdraw the funds before you are 59 and a half, but it is going to cost you an extra 10% in fees. So knowing that, you obviously really want to make sure that that math makes sense and that depending on what you need the funds for that you're prepared to pay for the extra taxes that come along with that. And you are also understanding how much money you're going to net post all of the fees. So keep that into mind, but know that you absolutely can get access to it. Another one way you can get access to the money is through a hardship withdrawal. So let me run through a few ways that you would qualify for a hardship withdrawal. If you have medical expenses, if you are attempting to purchase your first primary home, if you are trying to stop an eviction from your primary home, if you have tuition payments that are due for you or a spouse, if you have funeral expensive that are incurred by participants or the spouse of the plan, if you have home repair damages that would qualify as a casualty tax deduction, or if you experience any losses due to a disaster that is declared by fema. These are all different reasons that you would have access to what is called a hardship withdrawal. Meaning that you can go in and pull money out of your 401k to cover these different expenses. So I think that's really important to know as well that if again, life be life and you are in a tough spot, you absolutely have access to some of those funds as well. And the last option for you, if you want to utilize some of the funds in your 401k account without paying the 10% withdrawal fee, you can actually take out a loan against your 401k. Now you obviously really want to make sure that this is something that's going to make sense for you because you are going to be pulling money out of an account that could be continuing to compound and grow interest for you and help you reach your retirement goals. The benefits of this is that it's not going to show up on your report like your credit report. It's not going to show up as new debt and all of the interest that you're going to be paying back on it is going to be back to yourself. So there's definitely benefits and definitely a time or place for taking out a 401k loan. But yeah, just look at all your options and see what makes sense for you. But just know your money is not trapped there and while you don't want to lean on it if you don't necessarily have to, if life gets in the way, you absolutely have access to some of those funds if you shall need it. So I hope that this answers some of the questions that you've had about a 401k. If there's anything that was left unanswered or unclear, let me know what else you need to know to make yourself feel super confident with your 401k investment strategy and how I can help you get there quicker. I hope you have a wonderful rest of your day and we will talk very soon. Bye. Hey, before you go, I just want to go ahead and say thank you for spending a little bit of your time with me today. And also congratulations for finding a chunk of time to carve out and focus on you and moving the needle and becoming a better version of yourself. If there is anybody that you think could benefit from this podcast, please share it with a friend, share it with a family member. Feel free to share it on your socials and help me spread the word about busy getting better. Thank you for so much and I will see you on the next episode.