Fun With 401k Plans - America's Greatest Savings Tool!
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Episode 030 Summary:
They are the single biggest savings tool we have available to us. Are you using them effectively? That’s the question Host Josh Bretl explores on this episode of Retirement Equals Freedom, which is devoted to all things 401k:
- How they work.
- Who can contribute.
- Ways to make and monitor investments inside them.
- When it’s okay to withdraw funds from them – and how.
- Plus insights about #TaxNerd implications and an interesting loan option.
You’ll come away from this episode with a whole new depth of wisdom about 401ks and why they are such a valuable – but often misunderstood – vehicle for the kind of financial growth that adds up over time to the kind of robust retirement nest egg we all want to have.
And, on an irrelevant side note, if you doubt that there are harmonica players out there making good money as well as beautiful noise, listen to "Re: Stacks," (a Bon Iver cover), performed by legendary harmonica player Grégoire Maret. As promised by Co-Host Dave Schmidt on the show, you can find one of his favorite harmonica-featured tunes of the moment here.
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Explore the services that FSR Wealth Strategies offers and schedule a discovery call with one of the team’s CPAs. When it comes to living your best life, it’s never too early to get started!
Rampage. Sushi. Coffee shop.
Were Dave’s ears burning? Josh meets a genuine fan of the pod, live and in person at a recent convention for professional financial advisors!
Karaoke hijinks and other updates on the family music front. Instruments are coming out and bands forming in the greater Elmhurst area!
What’s In a Name: The term 401k comes from the subsection of the Internal Revenue Service code that talks about the associated tax rules.
Employer-sponsored retirement savings vehicles are an alternative to pension plans whose rules and terms are mediated by your employer.
Ways you can grow your 401k:
- Via paycheck deductions.
- As a matching benefit provided by your employer and based on the percentage of salary you contribute.
- Through profit-sharing contributions that your employer makes regardless of whether you personally contribute.
With Apologies to Alyssa Milano: All About ERISA, the Employee Retirement Income Security Act designed to protect participants in retirement plans such as 401ks.
Company guidelines vary, but access to your 401k funds may be limited by a “vesting schedule” of up to several years. No, Dave. Nothing to do with sweater vests!
About two flavors of 401k and how they impact employee contributions:
- Traditional 401ks are based on pre-tax earnings.
- Roth-style 401ks are based on post-tax earnings.
FYI: Employer contributions are almost invariably made in pre-tax dollars.
A Common Misconception: When you contribute to your 401k, you are NOT giving your employer money or even access to the funds (which are set aside on your behalf).
All About the 59½ Rule:
- Withdraw money prior to reaching this age and you will pay a penalty!
- Penalties vary depending on additional tax liability (at what level contributions and gains have previously been taxed).
- Exceptions to the rule: Disability, medical expenses and higher educational expenses. (The Harvard of Harmonica Schools may or may not be exempt.)
Understanding what happens to the money you’ve got tied up in your 401k:
- You have choices as to how to invest the funds, including a spectrum of options that include:
- Mutual funds (a familiar diversification tool that takes the personal responsibility and emotionality out of investment choice and timing).
- Target Date Funds that are time-based.
- More recently: Some funds have opened the world of investment choices, which can be dangerous.
When/How Can I Withdraw my 401k Funds?
- Whenever you leave a company.
- Whenever you’re dead.
- Companies set the rules and can offer 401k loans of up to $50,000:
- Interest is based on the prime rate.
- Payments are withheld from your paycheck.
- Interest (minus loan fees) ultimately accrues back to you.
- To Consider: If you are fired or leave the company, you’re liable to repay the loan in full within 60 days or suffer significant penalty.
- You can take out a loan while continuing to contribute to the overall 401k.
“In-Service Distributions” are an available option after 59½ that enables individuals to incrementally roll their 401k funds over to a personal IRA – giving them maximum flexibility and personal control over the investments.
They can be very helpful in transition to retirement!
What’s in it for employers?
- For larger employers, 401ks are a benefit designed to attract, support and please employees.
- For smaller employers, there can be tax benefits.
Dave Highlights 401zzz: It’s not in the tax code, but it’s real. Time for a break!
Get to Know Josh and Dave: If you could make one of your hobbies into a profession, which would it be?
- Dave: He’d leverage his love and mastery of video games (’80s and ’90s arcade classics, of course!).
- Josh: He’d be a chef – cooking for and making people happy!
Dave Relates to Retirees: There is a perfect 1:1 correlation between the amount of choice Dave can handle when he’s looking at a menu and the amount of choice soon-to-be retirees want in managing their 401k options. Josh indeed loves the feeling of relief he witnesses when he advises Dave on the meal option best suited to him – much as he enjoys advising clients on which retirement investment choices are going to be best suited to their particular needs and wants. Dave nailed this one!
Get well quick, Josh! Loyal listeners eagerly await your triumphant return!
“I try to listen to as many (financial advisor) podcasts as I can and yours is the only one I actually enjoy. I’ve never met Dave, but I think I’d like him a lot!” ~A bona fide fan of Retirement Equals Freedom.
“Big or small, most employers have a 401k.” ~Josh
“Do you know what it does to my self-esteem when I’m talking about vesting schedules and you just laugh at me?” ~Josh
“Most times employer (contributions) are pre-tax, so whenever employer money comes out it will always be taxed. Employee money can be traditional or Roth.” ~Josh
“One of the problems with 401k plans is that it allows the Average Joe to make some pretty serious investment choices.” ~Josh
“The market and ‘professional investors’ are really good at taking emotion out of the equation. They’re not selling when it’s low and buying when it’s high. They’re making good decisions, but it’s not their money.” ~Josh
“Deciding where your money should be is something you’re looking at on a constant basis; something your advisor should be looking at on a constant basis for you.” ~Josh
“For the last 10 years (investing) hasn’t been that hard because the market has managed to trade up – except for the last 12 months. I think people are starting to realize that this isn’t something that you can just set it and forget it.” ~Josh
“You’ve got to really pay attention to (your investments) and at the same time take emotion out of it as much as humanly possible.” ~Josh
“401ks are the single biggest savings tool that Americans have. Most people use them. Very few people know how to do it effectively.” ~Josh
“Josh, I quit! I’m going to become a professional Rampagist!” ~Dave
- Learn more about the federal government’s ERISA, rules of the road for employee retirement income distributions.
- Charmed, We’re Sure: Here's a link for fans of Alyssa (not ERISA) Milano
- R=F's new private Facebook group. Come hang out!
- Don’t miss out on our staff java pick: Cometeer Coffee!
About your Co-Hosts
A certified public accountant, Josh Bretl has spent the past two decades growing FSR Wealth Strategies into a firm that specializes in tax-focused retirement planning. Because taxes have the single biggest impact on how much you can spend in retirement, Josh is dedicated to developing individualized financial plans that extend and grow his clients’ retirement savings. Based in Elmhurst, Illinois, FSR Wealth strategically preserves and maximizes resources through tax-efficient strategies designed to fulfill retirement dreams.
Apart from producing and co-hosting The Retirement = Freedom Podcast, Josh's longtime friend Dave Schmidt is a content production and marketing adviser to local businesses and nonprofits. He’s also an advocate for t-shirts, all things 90s (especially the music), short walks and long naps. A serial “wallet forgetter,” Dave nonetheless swears that he has picked up the check on at least one or two meals with Josh over the years. Evidence pending.
FSR Wealth Management is a registered investment advisor located in Elmhurst, Illinois. Information and opinions contained in this audio have been arrived at by FSR Wealth advisors. All information herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, a solicitation or recommendation to purchase any security. FSR is not providing legal, tax, accounting, or financial planning advice in this audio. These views are as of the date of this publication and are subject to change.
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