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Estate Planning


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September 15th, 2020

Your 401(K) in 40.1 Seconds

So you have a 401(K)?

Now what is it? Quite simply, a 401(k) plan allows you to invest part of your paycheck before paying taxes on the money.  You will not be taxed until you withdraw money from the account. Better yet, some employers will contribute to the plan and may even match the amount you invest up to a certain amount.

What’s all this really mean?

  1. Free money – According to the Bureau of Labor Statistics, the average 401k match is 3.57%.  On a median household income in the United States of roughly $56,500, this amounts to a $1,600 bonus from your employer each year.
  2. Put the power of time to use – by making automated pre-tax contributions to your 401k each paycheck, you are painlessly saving for retirement and giving yourself roughly 40 years to invest it (this could be 4-6 doubling periods!)
  3. Take advantage of two tax breaks – first, you are making the contribution pre-tax so the money you contribute each paycheck is tax-deductible; and second, the investment earnings are rolled back into your 401k thus deferring the tax on them until you withdraw the money.

Then, if the unfortunate arises and you do need to access the money – most plans have loan or hardship withdrawals that allow you to either borrow or withdraw from your 401k without being penalized.

However, be on the lookout for the fees associated with the mutual funds and ETFs your company’s plan offers.  Too often I see clients with 401K investments in underperforming funds carrying high annual fees.

Contact us if you are curious to find out what your fund is charging you each year.

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