Target Date Funds – The Good, The Bad and The Ugly:
What’s The Best Approach – Traditional or Roth:
00:00 Intro
00:41 Fees
03:55 Taxes
06:11 Understanding Investments
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Disclaimer: Please note that this video is made for entertainment purposes only and not to be taken as financial advice. Always make sure to do your own research.
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LEARN MORE ABOUT: 401k Plans
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64% Of People Miss This About Their 401K | Common Misconceptions
When it comes to retirement planning, one of the most popular and widely used investment vehicles is the 401K. However, a recent study has shown that a staggering 64% of people are missing a crucial aspect about their 401K accounts. This revelation highlights the common misconceptions and lack of understanding that many individuals have when it comes to their retirement savings.
The first misconception that many people believe is that their 401K is a guaranteed source of income during retirement. While contributing to a 401K is an excellent way to save for retirement, it does not guarantee a certain level of income. The amount you accumulate in your 401K is dependent on several factors, such as the contributions you make, the performance of your investments, and the market conditions. It is essential to set realistic expectations and not rely solely on your 401K for your retirement income.
Another misconception that arises is that once you set up your 401K, you can forget about it until you retire. While it is true that your 401K will continue to grow without constant monitoring, it is crucial to review and adjust your investments periodically. As market conditions change, it is essential to ensure that your investment portfolio aligns with your long-term goals. Regularly rebalancing your investments can help optimize your returns and mitigate risk.
Additionally, many individuals are unaware of the potential tax implications associated with their 401K. Contributions to a traditional 401K are made with pre-tax dollars, meaning you’ll need to pay taxes on those funds, along with any earnings, when you withdraw during retirement. On the other hand, Roth 401K contributions are made with after-tax dollars, allowing for tax-free withdrawals during retirement. Understanding the tax implications of your 401K contributions can help you make more informed decisions based on your current and future tax situation.
Furthermore, some people wrongly assume that their employer’s matching contribution automatically covers their retirement savings needs. While employer matching contributions are a significant benefit, relying solely on them may fall short of your retirement goals. It is crucial to contribute beyond the matching amount to fully maximize the potential of your 401K.
Lastly, it is essential to be aware of the limitations and penalties associated with early withdrawal from a 401k account. Many people may be tempted to dip into their retirement savings for various reasons, such as emergencies or other financial needs. However, withdrawing funds from your 401K before the age of 59 ½ can result in additional taxes and penalties. It is important to explore other alternatives and consider the long-term impact before tapping into your retirement savings early.
In conclusion, 401K accounts are a valuable tool for saving towards retirement. However, it is crucial to dispel the common misconceptions surrounding them. By understanding the limitations, tax implications, and the need for regular monitoring, individuals can make more informed decisions and ensure their 401K aligns with their retirement goals. It is never too late to educate yourself about retirement planning and take the necessary steps to secure a comfortable future.
Mine was the typical "invest in funds not individual stocks" deal. Really poor returns until I got control of the funds and learned stocks. Don't know of any good alternatives; 401ks were invented to help companies.
Do you have any information about the fees charged by managed funds inside target funds? We end up paying fees twice. Also, they collect fees and commissions when they decide to move your money from stocks to bonds and you have no control over that decision. I pity anyone who was moved into bonds in 2020 and now has to sell at a discount.
I'm retired and successful. However, the advice I would give to young people today who want to be independently wealthy is this: open a Crypto ROTH IRA. Fund it with quality coins from the top 15 or so. Don't over-diversify. Stay with quality. There is one crypto IRA company that if you do research will become evident. Set it, contribute regularly to it, and forget about it. Within 10 to 20 years, it will grow to an unimaginable tax-free account to draw from in the future. DO NOT drain it early. It will become your retirement Lifeboat in an increasingly insane world.
If your company matches or gives you money to put into your 401K, it is very important that you convert it to a Roth on an annual basis. Yes, that conversion will be taxable and might make you owe more tax in the year you do it. However, it then grows TAX FREE. It is much easier to convert when the Traditional 401K is small just like it is easier to cut a tree down when it is small.
Most people will be in a lower tax bracket when they retire, so having a pre0tax account is still a good idea. Prior to retirement, you just look at your current tax bracket to determine which account to fund. One trick is to have an HSA fund, and fund it fully. That contribution lowers your AGI income, so it won't push you into a higher tax bracket. Also if you are married, with say an 80K retirement income, you can take about 25K off the top for the standard deduction. So now your taxable income is only 55K, and you are well within the 12% tax bracket.
Many companies who offer 401Ks do not have Vanguard. In fact that offer sub par mutual funds that are very expensive. But you have no choice if you want to take advantage of the tax deduction and/or company match. You will have to wait until you retire to roll it over to an IRA where you can have inexpensive index funds.
When discussing Traditional VS Roth. It is important to note that any company match will be traditional.
You should be more informed if you are going to advise people…you are wrong about the taxes
Should I get a Roth IRA max it out every year AND get a Roth 401k and get try to max that out? Should I get both? What would YOU do I’d love your opinion please also others watching this vid thanks!
Fees dont matter. Returns net of fees do.
you're damn cute
My 401(k) Plan has an asset based fee. That fee is a ripoff fee.
Hi Erin,
I found your channel today and love the content of your videos.
I just subscribed to your channel to get more of your great videos.
I self manage my 401k. When I started investing I used a financial advisor but I fired him after I figured out he was charging me the 1% fees for mediocre returns.
You pay taxes on your 401k distributions post reaching retirement age based on your income level tax bracket, if you live in the united states
Roth IRA or Roth 401ks are better than traditional watch this video
https://www.youtube.com/watch?v=SeRia5tP_Ws
you might save today in taxes but the amount it grows to you have to pay on all that money in retirement
With a 401K you have NO control. They ae a managed fund. Managers ALWAYS f' them up!
Very important information here regarding fees on your mutual funds. John Bogle, as mentioned, reiterates this over and over in his books. Nice job, Erin!
Some general wisdom when it comes to retirement and investing:
1. Index funds are less expensive than mutual funds. This is because most mutual funds have someone constantly making trades (called active management). This leads to transaction fees, management fees and often times expense ratio fees that are higher than normal. Passively managed funds take out the transaction fees and management fees, and have much lower expense ratios.
2. If your company offers a 401k match, what you put in every year is the max match.
3. Once you go above 6 index funds and/or 20 stocks, you are usually a) overdiversified, b) have redundant asset classes (paying multiple expense ratios typically for the same return), c) engaged in speculation which pretty much always loses money in the long run unless you were there at the beginning of an apple or Amazon, or d) a combination of all three.
4. An expense ratio of 1.25 means for every 10k invested, you owe $125. An expense ratio of 0.03 means for every 10k invested, you owe $3. So, you want to owe more or less money? My general rule is if the expense ratio is greater than 0.6, I'm not buying unless it's the lowest cost option in a selection of 401k funds for a key asset class like S&P 500 fund.
5. If you are eligible to have a roth ira, open one and contribute the max per year to it ($6,500). Money grows tax free, you have total control over what it gets invested in, and it comes out tax free. It also follows you everywhere instead of being tied to a job.
5. Learn rollover rules (within 60 days post termination) to avoid having to cash it out (taxes) or have it stuck where you can't contribute anymore to it.
6. 1st question to ask a new job: what is the vestment period. If it's three years, you have to work for the company at least three years, or they get to keep all the employer match money when you leave. If vested immediately, you keep all the money that is in when you leave.
7. If you're eligible for an HSA, use it. And watch a video about HSAs. Use these over flex savings accounts if possible.
8. Warren Buffet and Jack Bogel preached over and over again, the average individual in America needs 2 index funds, 3 for full exposure, 4-6 if you want specialty. They are an S&P 500 or total stock market, a total US bond market, a total international, a REIT (tax advantaged account only), and depending on your goals a mixture of dividend value or growth class. Anything else is betting against the market and the equivalent of a ticket at the horse race track. Can be fun, can win big. But do you really wanna bet your entire future on a horse race?
9. Good investing is like watching paint dry. Straight from Buffet himself. It's boring and dependable.
10. Anyone who says good investing is super complicated is probably a fund manager trying to convince you they are worth 1-2% of your total portfolio for managing it.
The tax rate would not be 22% it would be 10% for 0 to 11k then 12% 11,001 to 44,725
So I'm not doing the math but it's probably around 11.5% effective tax rate
But if you rollover a traditional 401k to an annuity after retirement, you get to profit off the entire amount from interest and just take minimum withdrawal every year.
You don't need a 401k, just start buying vanguard etfs monthly or weekly, never too late. All you need is 10 yrs of strength and hard work and you can retire happily
So something that is slightly incorrect is if you make 80k a year you are taxed at 22%. Only a portion of the 80k is taxed at 22%. The way tax brackets actually work out when it comes to your income is the first x amount of money you make is taxed at 12%, if you make above that dollar amount and move into the tax bracket anything after that cap of 12% is capped in that tax bracket. Example: let’s say Anyone that makes under 12k is taxed at 12% and 22% is anyone from 12,001-22,000. 24% 22,001-32,000. So if you make let’s say 40k the first 12k is taxed at 12% the next 10k would be taxed at 22% then the next 10k would be taxed at 24%. The remaining 8000 you make that year would be taxed in the next bracket and in the US that would be 32%. This is come from a CPA. Common misconception Americans make is the entire income they make that year is taxed in the new tax bracket based on crossing he threshold into that bracket. However it’s only the amount that moves past the threshold that is taxed in that bracket.
Question…. If someone is paying 1% fee for a 401(k), is that 1% of the total balance? So, as the balance goes up, that one percent would always be ever increasing?
Love this video. Been working as a consultant with participants and plan sponsors since 2017 and I wish I could just send them this lol.
Good video. But the tax bracket portion is wrong. 4:50
You make this so much more interesting. Maybe it’s your calm voice
Everyone knows traditionals are taxed, cmon
Great video
What if i dont report my 401k on my tax return.
I already paid my taxes
What i do understand is they rip you off after 40 to 45 yrs.
You think u walking out with 1 million dollars
Taxes you gotta pay
Your old, health care cost
And for 40 yrs, investors been playing with your money. Win some, lose some
The biggest mistake for a 401k is getting into one in the first place! Lets look at this. While company matching funds sounds good on the surface, it's not the way to go. The federal government DECIDES when you can take it out, how much you can take out, and penalties that are leveed on your account if you break the rules. One has to ask the question. Why is the federal government involved in your retirement? Why do they have any say in the parameters of your account? Rules, rules, and more rules. Not for me. I wish I had never participated in them. Now my money is held hostage by the government and the IRS. Better idea. Open an individual retirement account that you can access any time you want. You have to have discipline to take the money out and invest and not use it as a secondary savings account. Whether you are familiar with the stock market or not, it's not hard to invest in ETFs. Don't use just any investment professional because most of them are crooks and only in it for themselves. You are still subject to the ups and downs of the market, but at least if things go badly, you can pull your money out and not incur the wrath of an out of control government! If money management was taught in schools and people invested time in teaching themselves, there would be no need to have the government dictate what you can do with your money.
If I could go back and start over, I'd buy real-estate instead of giving my money to Wallstreet.
When you buy individual stocks instead of playing the game you pay taxes
I live in Oregon I'll do regular 401k and move to a none income tax state
Almost all my funds in my 457 are very very low fees
I do 6% into traditional and get a 5.5% match then do another 3% into roth, I expect to be in a lower bracket in retirement so how would you adjust this ratio?
I love my job and earn a nice salary. Unfortunately, it's kind of a Mom & Pop company and they don't offer a 401k. I do have an HSA through our company health insurance though and I max that out. I also max my Roth IRA and invest in a brokerage account. However, I really do wish I could have participated in a 401k plan.
Is she talking about the expense ratio of the funds in the 401K plan? If so, what do you expect? the fund managers aren't gong to manage for free. When choosing your investments, you also need to look at the performance of the fund along with the expense ratio. I'll gladly invest in a fund with 1.5% fee if it returns 12%.
I always max out my Roth 401k instead of traditional. What helped make my decision is knowing I can contribute the same amount but all the Roth will be tax free later.
Between state and fed top tax bracket of about 25 percent
What are the best ai and robotics mutual funds in TSP?
That 1 percent fee is interesting. Mostly because you explained it wrong..required revenue record keepers charge don't work that way. More over those fees could be covered with rev share investments or your employer covering it. Also the average RR is not 1 percent and hasn't been in years.
One of my favorite Erin Talks Money videos! Love that you addressed the tax penalty of withdrawing from your 401k. To make matters worse, that's only FEDERAL tax. State taxes can easily be another 7%.
Another idea for a video, in these Date targeted funds, WHY would someone with 30 years to retirement want 15% of their portfolio in fixed income?!!! You want ALL your money working hard for the next 40 years. I'm ~63 and am 97% invested. Why? Because that 3% is my living expenses for the next 9 months. I usually keep out 18 months, but I expect more upside by year end. Not collecting S.S. yet so that's a possible safety net.
The 22% tax rate specified at an income of 80K is not real in this presentation. That assumes that there was no personal standard deductions. If they were married it subtracts $27,700 from the gross income plus deduction for health care premiums. So almost 35 to 40K will be deducted from that $80K income. So the taxable amount(federally) would be about 11% not 22%.
My company matches up to 25% I'm contributing 13% traditional and 12% ROTH. all I see and hear is free money. Hope I'm contributing to maximize my contributions.
My company chose Vanguard for our 401k. I pay $6.75 every quarter in fees plus the yearly expense ratio of the fund.