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Basics of a 401k - 2018 401k Contribution Limits and Guidelines - YouTube
Channel: Learn to Invest - Investors Grow
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what is a 401k and how does it work a
401k is an employer-sponsored qualified
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retirement savings account there are a
few different types of 401k plans and
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investment options can vary from
employer to employer so there are three
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main benefits of 401k plans first when
you make deposits often called
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contributions to your 401k plan
well these contributions are made before
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taxes are taken out this means that your
federal taxable income that this year
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will be lower and many times state taxes
are also reduced
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thanks to these contributions second
your contributions grow without being
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taxed this means that any taxes you
would have paid on a typical investment
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account can now be reinvested tax-free
making the power of compounding work
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even harder for you and third many times
your company matches at least a portion
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of the contributions you make to your
401k plan these three benefits make 401k
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plans truly unique and powerful
essentially you pay less taxes this year
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your account gets to grow without taxes
getting in the way and your employer may
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give you essentially a retirement raise
by often matching at least a portion of
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what you put in one of the more popular
forms of matching is for the employer to
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contribute 50 cents for every dollar you
contribute some companies even match
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dollar-for-dollar now there are limits
to traditional 401k contributions 2018
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limits and 401k employee contributions
went up from eighteen thousand dollars
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in two thousand seventeen to eighteen
thousand five hundred dollars in 2018
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they call this a cost-of-living
adjustment now just because it went up
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in this example doesn't mean that it
will go up every year the eighteen
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thousand dollars from last year was in
place since 2015 now this is the
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employee contribution limit this does
not take into account employer matching
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the actual limitation for total
contributions in 2018 was increased to
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fifty-five thousand dollars from $54,000
in 2017 so we take the current total
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contribution limit of fifty five
thousand dollars and we subtract the
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employee contribution limit of eighteen
thousand five
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and we see that there is room for
another 36,500 this could come from
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employer matching or maybe your company
has some sort of profit sharing
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contributions now there's also something
called the ketchup contribution that
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most 401k plans allow this ketchup
contribution was put in place to allow
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for baby boomers to catch up on their
retirement savings in 2018 if you're
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turning 50 within the calendar year you
are eligible to contribute an additional
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$6,000 to your 401k plan there are some
nuances to this rule but broadly
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speaking 6000 is the limit and that is
on top of the 2018 limit of $55,000 so
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should you contribute to your 401k plan
and how much well knowing that every
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situation is different and every
employer is different the most accurate
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answer is well it depends on your
individual situation but broadly
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speaking it makes sense for most people
to contribute every year how much well
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as much as I can going back to the three
benefits we mentioned before well if a
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company matches your contributions well
you want to get as much of that money as
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possible here's an example if you had
zero in your 401k right now and you were
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going to contribute the eighteen
thousand five hundred uh limit every
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year for the next twenty five years
assuming the limit never went up and
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that money was going to grow by let's
say five percent per year
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well at the end of the twenty five years
your accountant be worth a bit over nine
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hundred and twenty seven thousand
dollars but if your employer put in just
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50 cents for every dollar you put in all
else being the same your account would
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now be worth about one point three nine
million that's more than a four hundred
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and sixty thousand dollar difference so
if it's being offered to you why
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wouldn't you take it now let's imagine
that your employer doesn't match it all
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well the fact that your yearly taxable
income is lowered and you get to invest
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that money without worrying about tax is
getting in the way well once again it's
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free money why not take it so what is
your 401k investing once again this
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depends on your employer oftentimes
you'll see a few investment options you
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might see equity funds which invest in
stocks bond funds which you may have
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guessed invest in bonds balanced funds
this is usually a combo of both stocks
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bonds and sometimes cash international
funds perhaps they offer emerging
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markets or developed markets generally
each fund will describe their offering
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what
invest in and oftentimes the general
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risk level will be spelled out for you
generally it makes sense to consider how
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long you're going to be investing in the
account and then choose the investments
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accordingly if you have any questions
about the world of investing any
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suggestions on videos please post in the
comments below and please subscribe as
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thank you
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