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Front Loading Your 401(k)? - Don't Forget The True Up - YouTube
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hi I'm Rick Vasa president of driven
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wealth management today we're
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specifically going to be talking to some
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of you high income earners that have
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heard the concept of front-loading your
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401k contributions normally this can be
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a savvy investment strategy but there
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are some important things to consider
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and if you're not aware of them you're
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going to be costing yourselves a lot of
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money so that's what we're going to
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cover today Before we jump into that I
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think it's important to set the context
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of what exactly is front-loading core
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401k contribution well normally what's
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going to happen is when you're
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contributing to a 401k plan you're going
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to have a percentage of your salary
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automatically reduced and sent off to
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the 401k with each paycheck that you
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receive so it's a very seamless and kind
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of behind-the-scenes process typically
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that's going to happen on each pay
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period so you'll have a choice in how
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much withholdings you're going to make
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that are sent off directly to the
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account now because the markets
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typically have a propensity to increase
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over time savvy investors might say well
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instead of doing that contribution every
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single month what if I could front-load
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those contributions and get as much into
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the account as possible early in the
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year so I have a higher probability of
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seeing those investments increase with
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the market over time so it can be a
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great strategy now it's important to
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recognize your 401k for 2020 has a
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contribution limit of 19 thousand five
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hundred so it's pretty large so there's
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a specific percentage of the population
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that this is going to be applicable to
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where they're going to be able to
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front-load those 401ks of course not
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everyone's going to be able to do that
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but before doing so it's really
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important that you speak with your HR
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department and ask if you are receiving
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a company match if the company will
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offer what's called a true up so a true
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up is probably best described using some
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Excel formulas to show you and I'll pull
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that up here so you can actually see
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exactly the math on what you could
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potentially be leaving on the table
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all right so let's assume you're working
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with a $200,000 salary and you're
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looking to max out your 401k
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contribution now
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typically on a per pay period that's
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going to be a 9.75% contribution rate
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that you would have plugged in for your
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401k and just to give you an idea that's
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a monthly value of 1625 that's going to
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be shuffled over to the 401k account so
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let's say for the sake of the example
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your company now is offering a match of
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5% for every dollar that you contribute
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into the plan well to give you an idea
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if you're getting paid on a monthly
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basis that means every time you're
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sending that one thousand six hundred
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and twenty-five dollars to your account
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your employer is also sending eight
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hundred and thirty three dollars and 33
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cents to the account so it's a pretty
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great deal now if you do decide to
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front-load your 401k plan though
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recognize you may be missing out on all
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of those contributions so for example
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let's say in the most extreme scenario
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you decide that you're going to max out
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your 401k entirely in that first pay
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period and so you have the full nineteen
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thousand five hundred going into the
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account well recognize the company is
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again only matching five percent so
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that's that eight hundred and thirty
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three dollars so you've now potentially
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cost yourself
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eleven more months of contributions that
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your employer is not going to be making
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so what you thought was in a soundy
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investment strategy just costs you close
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to nine thousand there ninety one
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hundred dollars so you've left a ton of
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money on the table now what you can do
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is talk to your employee HR department
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of your employer before making this
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decision and ask them if the company
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offers what's called a true up so if
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they do offer a true up you can still
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move forward with this investment
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strategy of front-loading your 401k
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contributions but at the end of the year
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that nine thousand one hundred and call
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it sixty seven dollars that the company
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would have otherwise making on your
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behalf they'll actually top off your
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account and fill it up with those
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contributions so you won't in fact miss
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out on it so it's extremely important if
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you decide to implement this
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front-loading 401k strategy that you
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make sure you're not leaving that money
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on the table because otherwise it
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defeats the entire purpose of the
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strategy its usual
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about 50/50 flip of a coin whether an HR
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department is going to say yes or no to
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the true up so it's definitely an
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important thing to ask don't just assume
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yours does and if they don't the reality
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is you're likely going to want to keep
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making those periodic contributions on
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your regular pay schedule you're really
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not gonna outweigh the benefits of
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getting that employee match with the
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benefits of that front loaded 401k
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contribution so that's it in a nutshell
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specifically for a lot of you
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high-income earners make sure to ask
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your HR department if you get the green
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light it is definitely something that
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you can look into and if your cash flow
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supports it you could be potentially
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earning quite a bit of extra money every
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single year that you're able to
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implement this type of process I hope
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you found that information helpful if
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you did I always appreciate you hitting
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that like button and be sure to
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subscribe if you're interested in
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getting more personal finance
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information like this to help you take
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control of your finances I'm Rick Bosley
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with driven wealth management thanks
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again for tuning in we'll talk to you
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soon
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