What is a 401k?
A tax favored retirement account
Has unique benefits
Has some serious drawbacks
Tax favored retirement account
You invest pre-tax dollars
Typically will come directly out of your paycheck before you
physically receive it
Earnings are compounded tax deferred
Have taken the place of most pension plans
Employer chooses 401k firm
Employer chooses to match a certain percentage of
Compounds tax deferred
Invest pre-tax dollars
Receive employer matching on a good amount of your
contributions (varies by company).
Allows you to choose where your money gets invested
Stable Value Funds
Cannot withdraw money until your 59 ½
If you withdraw early you get hit with a 10% tax penalty and
your withdrawal amount is taxed at your normal income tax
Your fund choices are severely limited
You are stuck with the managing firm your company selects
More companies are automatically enrolling employees into
401ks and employees don’t select where they want the
money to go.
5 most common 401k mistakes
You buy your company’s stock in your 401k
Invest a lot in stable value funds (unless you’re close to
Incorrect allocation of funds within your 401k
When you change jobs most people leave their 401k at their
former employer or worse cash it out.
Employee’s don’t allocate their retirement funds themselves.
4 things you must do
Contribute 1/12 of your yearly contributions unless there is
a big market pullback. In that case double your contribution
the next month.
Properly allocate your funds with the right mix of
investments based off of your age.
Invest in index funds or the lowest cost mutual funds.
Only contribute up to the amount your employer is willing
to match you. Beyond that amount contribute to your IRA.
What did you learn?