Fisher Investments Answers Your Most Common 401k Questions

Title screen appears, “Common 401(K) Questions”, a white screen follows with the following reference” Information in this Video is as of October 1, 2020. Please refer to www.IRS.gov for the most up-to-date information regarding 401(k) plans”

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A man appears on the screen wearing a navy suit, sitting in an office with a screen to his right, he begins to speak.

A banner identifies him as Bryan Schofield, 401(k) Solutions program Manager.

Bryan Schofield: 401k plans are one of the most common ways that people in the United States save for retirement. So, it's not surprising that when people have questions about investing in retirement, they often ask about 401(k)s.

The camera zooms away so we can see Bryan Schofield with the screen next to his right. In the screen “the question what is a 401(k)?” appears, underneath it a list, which follows: Employers-Sponsored, Save while working, Withdraw in Retirement, Several investment options. Several investment options.

Bryan Schofield: In this video, we'll cover some of the basics about 401K plans. We'll also talk about contributing to and withdrawing from 401(k)s. But for now, let's start at the top. What is a 401(k)s? A 401(k)s is a type of retirement savings plan many employers in the United States set up for their employees.

Bryan Schofield: The name comes from the section of the IRS tax code that created the provision for this kind of retirement plan. Here's how they work, during your earning years; you take a portion of your pay checks and transfer it to your 401K account. The idea is that you'll invest that money so it can grow over your entire working life, then you withdraw that money to help pay for things when you retire. Many plans give employees the opportunity to invest their 401K savings in various investments, like stocks, mutual funds, or exchange traded funds.

The screen appears to change content, on the white screen a question is written "what types of 401(k) plans are there?” it's then as if answered, followed by 2 points: “Traditional” and “Roth”.

Bryan Schofield: There are two basic types of 401K plans, the traditional 401 K and the Roth 401K.They differ slightly in how they relate to taxes

The screen changes to an info-graph showing how the IRS takes taxes from the investor before the 401(k) plan.

Bryan Schofield: For both types, contributions come from your paycheck. In a traditional 401K, you contribute to the plan before the IRS takes taxes out of your paycheck. Then, when you withdraw the money at retirement, the IRS taxes the withdrawals as ordinary income. With the Roth 401K, you contribute after the IRS has taken taxes out of your paycheck. Then, when you retire, you can withdraw the money tax-free.

The screen appears to change content again, this time the question “what Are the benefits of a 401(k) plan?” appears written, it's then as if answered, it is followed by 3 points: “Tax-advantaged saving”, “Potentially lower your Current taxes” and “Employer Contributions”

Bryan Schofield: So, what are the benefits of contributing to your employer's 401K plan? To start, they help you save for retirement with some tax advantages. You see, while that money is in there growing, it's doing so without taxes, eating away at it. That means you're not getting hit with taxes on capital gains or interest and dividend income while the money is invested. There's another potential tax benefit.

Bryan Schofield: If you're contributing to a traditional 401K because you're contributing before taxes, you're actually lowering your reported income to the IRS and potentially reducing your tax bill. With a Roth 401K, the potential tax benefit comes when you withdraw at retirement. Some employers match employee contributions in their401K plans up to a certain percentage. That's a tremendous benefit, because it essentially means free money to help you build your retirement nest egg.

The screen appears to change content again, this time the question” what types of investments should be in my 401(k)?” appears on the white screen, it's then as if answered, it is followed by 4 points: “Mutual funds”, “Exchange-Traded Funds”, “Stocks” and “Bonds”.

Bryan Schofield: The other decision you need to make with a 401(k), is how to invest your funds. Your employer's 401K provider will probably have a set of options to choose from, typically mutual funds or exchange traded funds called ETFs. Some 401K providers also allow you to invest in individual stocks and bonds.

The white screen appears to change content again, this time the question” How do I learn more about my employer’s 401(k) plan?” appears written, it's then as if answered, it is followed by 2 points: “HR Department” and “plan Provider”.

Bryan Schofield: If your employer offers a 401K plan, you might be wondering where to go. For more info. Two places. The first is your employer's human resources department. The HR team should be able to provide you with more details about the retirement savings plans your company offers.

Bryan Schofield: You can also get details from the 401K plans provider, usually an external vendor. This is the company that administers the plan for your employer. They'll be able to tell you account balances and help you adjust your investments. They may even provide educational materials to help you become a more confident retirement investor.

The white screen appears to change content again, a small title appears ”Employer Match”

Bryan Schofield: Need another reason to contribute? How about free money? Some employers offer incentives to encourage their employees to participate. They'll match some or all of the money you put in, and if your employer contributes, that's on top of your $19,500 limit. One last tip since there are restrictions on when and how you can withdraw from your401K, you might consider having other savings in case you have unexpected costs before retirement.

The white screen appears to change content again, this time the question” How much should I Contribute to my 401(k)?” appears written, it's then as if answered, it is followed by 3 points: “IRS contribution limits”, “$19,000 per year” and “$6,500 in catch-up contributions”.

Bryan Schofield: Next, we'll talk a bit more about contributing to a 401k. Probably the most important question, how much to contribute? It's good to save as much as possible within your means. If possible, you should try to max out your contributions. The maximum you can contribute is set by the IRS. Currently, the maximum yearly contribution to a 401K is $19,500. If you're over the age of 50, the IRS allows what they call catch up contributions. That's an extra $6,500 per year you can put into your 401K. But don't let those numbers intimidate you. When it comes to saving for retirement, every little bit helps.

The white screen changes now into a chart titled “$100 per Month over 30 Years” its showing returns over the years, assumes an 8% annual rate of return. calculations are hypothetical and meant for illustrative purposes only.

Bryan Schofield: Let's say you're able to put away just $100 a month. Over time, the power of compounding helps your savings grow. Assuming an 8% annual rate of return after ten years, that 100 a month would be worth over 18,000. In 20 years, you're looking at over 57,000. And after 30 years, $100 a month becomes over 141,000. Thanks to compounding, even saving relatively small amounts of money can add up big over time.

VThe white screen appears to change content again, this time the question” How can I access the Money in my 401(k)” appears written, it's then as if answered, it is followed by 3 points: “Regular withdrawals", "Early withdrawals” and “Loans”.

Bryan Schofield: Speaking of withdrawals, let's take a look at some common questions about taking money out of a 401K. If your employer offers a 401K plan and you've been contributing, it's natural to think about how you'll eventually be able to withdraw that money. There are three basic ways to withdraw money from your 401K. Regular withdrawals are the withdrawals you take when you're at or near retirement age. You can start taking regular withdrawals when you're 59 and a half years old. You should also be aware of Required Minimum distributions, or RMDS, when you reach age 72. The IRS requires you to withdraw a certain amount each year. That's the RMD, and the amount varies from person to person based on the amount you have in your retirement accounts and your age.

The screen jumps into the IRS website, showing an example of how to search for retirement topics.

Bryan Schofield: You can visit the IRS website for more info about RMDS and how to calculate how much you might need to withdraw. One of the main reasons people think about withdrawing money from their 401K before they reach age 59and a half is some kind of financial emergency. What the IRS calls an immediate and heavy financial need. Some employers allow for these types of hardship distributions, but the IRS has specific rules regarding what the withdrawal can be used for. And keep in mind that a hardship withdrawal will result in taxes and a penalty for most people, with a traditional 401K. If you withdraw before age 59 and a half, you may have to pay a 10% penalty on the amount you takeout, plus the regular income tax you'll have to pay.

Bryan Schofield: A couple other situations to mention that may spur an early withdrawal. If you pass away, your heirs can access the funds. Also, you can withdraw the funds in the unlikely event that your employer terminates the plan without another plan to succeed it. Some employers may offer loans to 401K participants. Here, you're borrowing from 401K funds that you've contributed and the employer contributed money that invested or 100% yours, with a 401K loan. Since you're borrowing money from yourself, you're required to pay interest. Keep in mind there are restrictions. In most cases, the maximum amount you can borrow is either $50,000 or 50% of your vested balance, whichever is less, and you'll generally have to repay the full amount within five years, by making at least quarterly payments. The most important thing to keep in mind is that even though you're paying yourself interest, taking a 401K loan could negatively affect your long-term retirement savings.

The white screen appears to change content into an information mark, followed by the line, “Check with your HR Department or 401(k) Plan Provider for Details”

Bryan Schofield: You can find out more details about your401K plans withdrawal options by contacting your employer's HR department or the plans provider.

In the white screen, the title “Fisher Investments "appears underneath it the Red subscribe button appears, above it a small hand hovers over it and clicks both it and the ring-bill icon next to it.

Bryan Schofield: If you enjoyed this video, you can click the subscribe button and ring the bell to be notified when we publish new content. Thanks for watching.

A series of disclosures appears on the screen “Investing in Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.”

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