Crash course on 401(k) plans

Crash course on 401(k) plans

You might assume that a 401k or a mutual fund is a solid way to save for retirement. Here's a quick crash course on 401(k) plans.


Money in a 401(k) is often invested in stocks and mutual funds. If the market goes up, so can your money. If you have money in a 401(k) with stocks or mutual funds, your money could be at risk for loss as well! That means if the market goes down, you can lose.


Lastly, your 401(k) contributions are made before you pay taxes on the money, so you're taxed as you withdraw money from the plan. (Here's where you see that you are being taxed on the crop, not the seed.)


Your money could be tied up until you retire, unless you want to pay the penalties and taxes on an early withdrawal.


A couple of the threats that we must protect against to build wealth are, 1) the actual loss of your money in the market (once you lose money, it can take a substantial amount of time to make it up), 2) taxes and 3) interest


Many don't know it, but they could be paying up to one-third of every dollar they make towards interest of some sort. This is essentially making them employees of the tax man and the lenders at the same time.


Let's talk about putting your money at risk of loss. To begin, let's look at how your mutual fund or stock performs. How much money you end up with for retirement usually depends completely on the market?


The market is uncertain, it can go up, it can go down or it can stay flat and completely out of your control. So your future is tied to how well the market cooperates, without any input from you.


How much do you really know about your 401(k)?


Let's start with your 401(k) manager - do you even know who it is?

Do you know what funds you're invested in or even what companies your funds invest in? 


Most people enrolled in 401(k) plans can't even list the funds or companies in which they are investing. That's risky business.


Tax implications. Think about this: if you don't like paying taxes right now, what makes you think you're going to like it any better 20 years from now? When you start to withdraw your 401(k) money for retirement, you're going to have to pay taxes on it. That means if you're in a 28% tax bracket, you could have about one-third less actual money than you have in your account.


(A quick tip: in a 401(k) plan, you'll be paying taxes on the crop, not the seed. 


People invest in a 401(k) plan to save taxes today, but in reality, they could end up actually paying more taxes when they retire - not only because they're paying on the crop, but because they could potentially be in a higher tax bracket when they begin taking distributions from their 401(k) plans.)


If you have children, if you don't manage to use up your 401(k) during your retirement, it will be passed on to your heirs. Not only could they face income tax on the money they receive from your 401(k), but they have to pay estate taxes as well.


401(k) plan Fees.


Many don't know how in fees they are really paying. Unfortunately, it can add up to a substantial sum, and the fund managers alway get paid whether your money grows or not.

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