Personal Wealth Management / Retirement

Fisher Investments Answers Your Most Common 401k Questions

In this video, Fisher Investments lays out the foundational aspects of 401(k) saving and the potential benefits of utilizing these retirement plans.

401(k) plans can provide retirement savers and workers with tax-advantaged saving, possibly lower current taxes (depending on the plan) and potentially even employer contributions—basically free money your employer contributes to your 401(k) plan account.

Transcript

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401k plans are one of the most common ways that  people in the United States save for retirement.  
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So, it's not surprising that when people have  questions about investing in retirement, they often  
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ask about 401(k)s. In this video, we'll cover some  of the basics about 401(k) plans, we'll also talk  
0:29
about contributing to and withdrawing from 401(k)'s,  but for now, let's start at the top. What is a 401(k)?  
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A 401(k) is a type of retirement savings plan many  employers in the United States set up for their  
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employees. The name comes from the section of  the IRS tax code that created the provision  
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for this kind of retirement plan. Here's  how they work: During your earning years,  
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you take a portion of your paychecks and  transfer it to your 401k account. The idea  
1:00
is that you'll invest that money so it can grow  over your entire working life, then you withdraw  
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that money to help pay for things when you retire.  Many plans give employees the opportunity to  
1:12
invest their 401(k) savings in various investments  like stocks mutual funds or exchange traded funds.  
1:20
There are two basic types of 401(k) plans, the traditional 401(k) and the Roth 401(k). They differ  
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slightly in how they relate to taxes. For both  types, contributions come from your paycheck.  
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In a traditional 401(k), you contribute to the plan  before the IRS takes taxes out of your paycheck,  
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then when you withdraw the money at retirement  the IRS taxes the withdrawals as ordinary income.  
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With the Roth 401(k), you contribute after the  IRS has taken taxes out of your paycheck then  
1:54
when you retire, you can  withdraw the money tax-free.  
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So, what are the benefits of contributing  to your employer's 401(k) plan?  
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To start, they help you save for retirement with  some tax advantages. You see, while that money  
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is in there growing, it's doing so without taxes  eating away at it. That means you're not getting  
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hit with taxes on capital gains or interest  and dividend income while the money's invested.  
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There's another potential tax benefit if  you're contributing to a traditional 401(k).  
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Because you're contributing before taxes, you're  actually lowering your reported income to the IRS  
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and potentially reducing your tax bill. With  a Roth 401(k), the potential tax benefit comes  
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when you withdraw at retirement. Some employers  match employee contributions in their 401(k) plans  
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up to a certain percentage. That's a tremendous  benefit because it essentially means free money  
2:51
to help you build your retirement nest egg. The  other decision you need to make with a 401k is how  
2:57
to invest your funds. Your employer's 401(k) provider  will probably have a set of options to choose from,  
3:05
typically mutual funds or exchange traded funds  called ETFs. Some 401(k) providers also allow you  
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to invest in individual stocks and bonds. If your  employer offers a 401(k) plan, you might be wondering  
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where to go for more info? Two places, the first  is your employer's human resources department.  
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The HR team should be able to provide you with  more details about the retirement savings plans  
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your company offers. You can also get  details from the 401k plans provider,  
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usually an external vendor. This is the company  that administers the plan for your employer.  
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They'll be able to tell you account balances and  help you adjust your investments. They may even  
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provide educational materials to help you become a  more confident retirement investor. Next, we'll talk  
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a bit more about contributing to a 401(k). Probably  the most important question, how much to contribute ? 
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It's good to save as much as possible within your  means. If possible, you should try to max out your  
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contributions. The maximum you can contribute  is set by the IRS. Currently, the maximum yearly  
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contribution to a 401(k) is $19,500. If you're over  the age of 50 the IRS allows what they call  
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"catch-up contributions" that's an extra $6,500 per year you can put into  
4:32
your 401(k), but don't let those numbers intimidate  you. When it comes to saving for retirement, every  
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little bit helps. Let's say you're able to put  away just $100 a month. Over time the power of  
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compounding helps your savings grow. Assuming an  8 percent annual rate of return, after 10 years that $100  
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a month would be worth over 18,000. In twenty  years, you're looking at over $57,000 
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and after thirty years, $100 a month  becomes over $141,000. 
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Thanks to compounding, even saving relatively  small amounts of money can add up big over time.  
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Need another reason to contribute, how about  free money? Some employers offer incentives  
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to encourage their employees to participate.  They'll match some or all of the money you put in  
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and if your employer contributes that's on top of  your $19,500 limit.  
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One last tip, since there are restrictions  on when and how you can withdraw from your  
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401(k), you might consider having other savings in  case you have unexpected costs before retirement.  
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Speaking of withdrawals, let's take a look at some  common questions about taking money out of a 401(k).  
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If your employer offers a 401(k) plan and you've  been contributing, it's natural to think about  
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how you'll eventually be able to withdraw that  money. There are three basic ways to withdraw  
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money from your 401(k). Regular withdrawals are  the withdrawals you take when you're at or  
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near retirement age. You can start taking regular  withdrawals when you're 59 and a half years old.  
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You should also be aware of required minimum  distributions or RMDs. When you reach age 72,  
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the IRS requires you to withdraw a certain amount  each year, that's the RMD and the amount varies  
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from person to person based on the amount you  have in your retirement accounts and your age.  
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You can visit the IRS website for more info  about RMDs and how to calculate how much you  
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might need to withdraw. One of the main reasons  people think about withdrawing money from their  
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401(k) before they reach age 59 and a half, is some  kind of financial emergency–what the IRS calls an  
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immediate and heavy financial need. Some employers  allow for these types of hardship distributions  
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but the IRS has specific rules regarding  what the withdrawal can be used for  
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and keep in mind that a hardship withdrawal  will result in taxes and a penalty for most  
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people. With a traditional 401k, if you withdraw  before age 59 and a half, you may have to pay a 10 percent  
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penalty on the amount you take out, plus  the regular income tax you'll have to pay.  
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A couple other situations to mention  that may spur an early withdrawal,  
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if you pass away your heirs can access the funds,  also you can withdraw the funds in the unlikely  
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event that your employer terminates the plan  without another plan to succeed it. Some employers  
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may offer loans to 401(k) participants. Here you're  borrowing from 401(k) funds that you've contributed  
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and the employer contributed money that is  vested or 100 percent yours. With a 401(k) loan, since you're  
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borrowing money from yourself, you're required to  pay interest. Keep in mind, there are restrictions  
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in most cases the maximum amount you can borrow  is either $50,000 or 50 percent of your vested balance  
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whichever is less and you'll generally have to  repay the full amount within five years by making  
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at least quarterly payments. The most important  thing to keep in mind is that even though you're  
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paying yourself interest, taking a 401(k) loan could negatively affect your long-term retirement  
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savings. You can find out more details about your  401(k) plan's withdrawal options by contacting your  
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employer's HR department or the plan's provider. If  you enjoyed this video, you can click the subscribe  
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button and ring the bell to be notified when  we publish new content. Thanks for watching!

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