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401K for Dummies - A Beginners Guide to 401K Plans - YouTube
Channel: Oak Harvest Financial Group
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Ever feel like you're not quite using your
401k properly or maximizing its effectiveness,
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or maybe there are things that you don't quite
understand? This video is going to get to
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the bottom of it for you.
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Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial
Group, host of the Retirement Income Show
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and Certified Financial Planner Professional.
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Okay, so first things first, let's talk about
free money, and this is the match that your
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employer may offer when you make a contribution
to your 401k. So the language may go something
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like this: 100% match on the first 3% and
a 50% match on the next 2%.
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So first, you need to be making contributions
to your own account before your employer will
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match what you put in. But if your salary
is 100,000, and you contribute $10,000, the
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first 3% is $3,000, they're going to match
that give you $3,000 in your account.
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The next 2%, they're going to match at 50%.
So what this language means is if you put
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in $10,000, and your salary is 100, you're
going to get $4,000 in free money. So you
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may want to go through and understand that
a bit more closely, but that's how that works,
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that's what that language means.
Now, for 2020, the max contribution you can
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put into your 401k, and again, we encourage
you to save as much as you can for retirement,
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if you're less than 50 years old, $19,500,
if you're 50 years old or greater, 26,000
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is the maximum that you can put into your
401k.
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Now, once you've decided how much you're going
to put in there, and you understand the match
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you're going to receive, you have to decide
if you're going to put that into the pretax
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part of your 401k or the Roth part of your
401k.
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Now most of you will have this option available
to you, some of you won't, to put it into
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the Roth 401K. If you don't, talk to HR, tell
them you want this in your 401K, it is in
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your best interest and you have a right to
advocate for things that are in your best
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interest when it comes to retirement savings.
So what this means is if you put it into the
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pretax portion, you will receive a current
tax deduction, you will not pay taxes on that
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income as it goes into your 401k, it will
grow tax deferred and then in retirement,
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when you take it out, you will owe income
taxes on everything that you take out of that
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account.
Or, you could put it into the Roth part, you
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will get no tax deduction for putting money
into that 401k, into the Roth, you will pay
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taxes on that income today, but it will grow
tax free forever and when you get to retirement,
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all of that money plus all of the interest
will come out tax free.
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So if you think taxes might be higher in the
future, it's a wise idea to consider putting
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some money, if not all of your contribution
depending on your situation, into a Roth,
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the Roth part of your 401k.
Once you've figured out where you're going
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to put it to, now you have to figure out your
equity and bond allocation. So fancy words
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that mean what are you going to invest in?
So you have to choose between the current
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funds inside your 401k and then future contribution,
so money you will put it in the future, how
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you want those future contributions to be
invested and how do you want your current
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funds to be invested?
One thing people have done over the past is
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create these target date funds. Target date
funds are essentially funds that are used
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to target when you expect to retire. The 2030
fund, 2040 fund, 2050 fund. As you go out
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in time, you have more exposure to stocks.
That means you're younger, you should be invested
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more in stocks because over the long term
they return, or are expected to return much,
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much higher than bonds. The closer you are
to retirement, theoretically, the closer you
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should choose a date for your target funds,
depending on the amount of risk you want to
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take in your account.
Now, should you take a 401k loan? If you take
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a 401 k loan, there's a few things you need
to know. First, the maximum amount that you
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can take as a 401k loan is 50% of your account
balance or $50,000, whichever is less. There
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must be a loan agreement, there must be an
interest rate that you pay, a loan must be
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repaid within the five year term and payroll
deferrals or salary deferral, so it comes
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out of your paycheck is how you pay that 401k
loan back.
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Now if you can absolutely avoid it, do not
take a 401k loan, these are not good for your
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retirement. But if you do need to, there are
things in place that can allow you to do this.
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And if you need a hardship withdrawal, this
means you're younger than 59 and a half and
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you need to take money out of that account,
you can take a hardship withdrawal, although
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this is very, very ill advised because you'll
have to pay income taxes and a 10% penalty
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on the withdrawal that you make. Your employer
does not have to allow this, but if they do,
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the IRS allows it at a very, very steep cost,
but for certain medical expenses, home Buying
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expenses for a principal residence, 12 months
worth of tuition and fees, to prevent being
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foreclosed, and if you have casualty losses
from a hurricane, fire or something like that.
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So this is good information. You want to share
this stuff with your friends, with your family
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members, so they understand how to make 401k
withdrawals, what the rules are, and understand
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that if we are saving money in our 401k, the
sole purpose, the sole purpose of a 401k is
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to provide a retirement income. That's it.
That's exactly what the 401k is designed to
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do. So hit the like button, subscribe to the
channel and I look forward to keeping you
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more connected to your money.
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