Your 401K is a Waste of Time

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What Is a 401(k) Plan?
A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. It is named after a section of the U.S. Internal Revenue Code. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.

How 401(k) Plans Work
There are two basic types of 401(k) accounts: traditional 401(k)s and Roth 401(k)s, sometimes referred to as a "designated Roth account." The two are similar in many respects, but they are taxed in different ways. A worker can have either type of account or both types.

Contributing to a 401(k) Plan
A 401(k) is what's known as a defined-contribution plan. The employee and employer can make contributions to the account, up to the dollar limits set by the Internal Revenue Service (IRS). By contrast, traditional pensions [not to be confused with traditional 401(k)s] are referred to as defined-benefit plans—the employer is responsible for providing a specific amount of money to the employee upon retirement.3

In recent decades, 401(k) plans have become more plentiful, and traditional pensions increasingly rare, as employers have shifted the responsibility and risk of saving for retirement to their employees.

Employees are also responsible for choosing the specific investments within their 401(k) accounts, from the selection their employer offers. Those offerings typically include an assortment of stock and bond mutual funds as well as target-date funds that hold a mixture of stocks and bonds appropriate in terms of risk for when that person expects to retire. They may also include guaranteed investment contracts (GICs) issued by insurance companies and sometimes the employer's own stock.

Contribution Limits
The maximum amount that an employee or employer can contribute to a 401(k) plan is adjusted periodically to account for inflation. As of 2020 and in 2021, the basic limits on employee contributions are $19,500 per year for workers under age 50 and $26,000 for those 50 and up (including the $6,500 catch-up contribution).

If the employer also contributes—or if the employee elects to make additional, non-deductible after-tax contributions to their traditional 401(k) account (if allowed by their plan)—the total employee/employer contribution for workers under 50 for 2021 is capped at $58,000, or 100% of employee compensation, whichever is lower. For those 50 and over, again for 2021, the limit is $64,500.

Employer Matching
Employers who match their employee contributions use different formulas to calculate that match. A common example might be 50 cents or $1 for every dollar the employee contributes up to a certain percentage of salary. Financial advisors often recommend that employees try to contribute at least enough money to their 401(k) plans each to get the full employer match.

Contributing to a Traditional and Roth 401(k)
If they wish—and if their employer offers both choices—employees can split their contributions, putting some money into a traditional 401(k) and some into a Roth 401(k).

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#401K #401KProblem #Retirement
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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[viewfromthehighchairr]

Investing in Roth IRA can be a good choice since they are funded with after tax dollars, your contributions can grow tax-free over time. When you withdraw money from your Roth IRA in retirement, you won’t have to pay tax on it, which will help you keep more of your hard-earned money. Compounding is the process of earning interest on your initial investment, as well as on the interest that investment earns. This means that over time, your investment can grow exponentially. So the earlier you start investing, the more time your investment has to grow through compounding

[cherrygarciafan]

All three have their pros and cons. An individual should use all three and allocate capital based on their specific set of circumstances.

[vinnv]

14:07 "Why would you plan for your marginal tax rate to be lower in the future?"

A lot of couples don't plan to need over $300, 000 per year in the later years of their life, when their kids have moved out, their home is paid for, and they have no debt. A lot of us might consider this excessive, for others it just isn't attainable with the other costs of living and the other goals that they have during their life (travelling before they're too old to do it, raising children, owning their own home, etc.) You get a $24, 000 standard deduction right off the top, so the first $24, 000 you make each year doesn't count towards the taxable income. After that, many retirees will be in low tax brackets, and a traditional can make sense. I think it's a bit bonkers to say that if you're making $300, 000 per year right now, you should plan to spend that much in retirement. I would bet that for a lot of the people who make $300, 000 per year right now, they're making that money working their butts off so that they can retire early and live a modest life.

A regular brokerage is great too, but you're suffering tax drag every single year. Even if you don't sell anything during your whole working life, you're still paying taxes on the dividends and bond interest.

This is not to mention the fact that you can take the tax savings you get today from the traditional 401(k) and reinvest it (perhaps into a Roth IRA, or a regular brokerage) which allows for more compounding. Over 30-40 years, that adds up. I know another commentator brought this up to you already, but I feel like you brushed it off.

[jasonfbaker]

Also consider legal protection. 401k and IRA have protections from law suits.

[x]

This video is for entertainment purposes only

[alexanderlavoie]

I have been doing this anyways. I have a 401K through my job, but I only put in up to the match (6% dollar for dollar match), I max out my Roth IRA, and I put everything else into my regular brokerage account.

[FreakyLynx]

I simply don’t trust the government to not tax my Roth accounts twenty years in the future when I retire. I’ve been contributing to all three buckets: traditional 401k, Roth IRA, and a brokerage account but by far my money is in the 401k.

I will also say there’s a good reason you can live in a lower income bracket after you retire - you’ve hopefully got your mortgage and other loans paid and if you have kids then what costs associated with them are off the table.

[brandoncomer]

kinda, but a 401k is going to let you take $23000 (or whatever the 401k limit is) and invest and earn interest off the total amount, while if you take that as taxable income and then reinvest it in a taxable account you're only going to have something like 15-16k after taxes to earn interest off of. The compounding interest on the 401k is going to far outstrip the taxable account long term.

[IwasRetired]

Good summary of the various account types. Two wrinkles I learned after I was Retired at age 58. Traditional 401k funds (maybe those funds that you contributed to get the employer match) are available to you after age 55 (or age 50 for cops and some public employees) if you leave employment from that employer. So you could retire at 55 and take some money out without the 10% penalty. Wrinkle number two: Roth 401Ks have RMDs! I'm planning to roll over my Roth 401k money to a Roth IRA before age 72 to avoid the RMDs. I set up a Roth IRA with a conversion from an tIRA to make sure the Roth IRA is at least five years old. So I'll have all that Roth money completely on my own terms.

[TanManFixes]

you need ALL THREE. that is the answer. max out ROTH. Max out 401. and whatever is left is brokerage account and real estate.

[fzigunov]

This video shows you've got no idea of what you're talking about. The traditional 401k allows you to invest more (not considering the company match) because you invest pre-tax money.
Thus, you will have more money at the retirement age. The taxes are greater, but you can also withdraw more because you will have more principal. The optimal solution depends on the individual parameters (time horizon, income and target withdrawal amounts). There's a crossing point for Brokerage vs 401k. But you didn't run any actual analysis to make your argument, and still somehow managed to make this video 15 minutes long.

[taytay]

When compare traditional IRA and standard brokerage account, we need also consider that one is pre tax money and one is after tax money for the contribution, which means you will potential pay higher tax rate on the after tax money to deposit into standard brokerage account since when get taxed when you are young and working. On the other hand, when you pay tax on the contribution amount for you traditional IRA withdrawal, you potentially paying lower tax rate since you’ve retired and has no income

[drdougful]

Jake doesnt appear to take into account that when you contribute pre-tax, you will be investing a lot more money. The most important factor in growing your investments is, simply, time. If you can invest more when you are in your earlier years, it will grow thru compounding in a pretty amazing way. The best thing you can do is get as much money invested as early as possible. Thats just what pre-tax investments allow. (I do agree, though, that when your salary is low- and thus your tax rate also low- it is best to bulk up your Roth first!)

[matt]

401K helped me buy my first home. Definitely not a waste with the 100% employer match up to whatever percentage.

[ricky]

100% agree on the age of using funds, it’s an important consideration. I do think you are vastly underrating the value of growing tax free money over time. You fixate on the tax rates when pulling out, but not on the growth of tax free money. $100 at 7% over 30 years = $812, vs. $75 (after tax example) over the same period = $601.

[cjmhall]

One thing that wasn't mentioned was that the upfront tax savings from a traditional 401K allow you to invest ~1/3rd more into the market which will compound and appreciate in the years leading up to retirement. Even though you are being taxed on the distribution, the portfolio size at retirement will be significantly larger than a Roth account.

[chrisolivo]

My biggest fear is in 10 years, these politicians increase all these tax rates because they know they have a gold mine of people retiring. The National Debt is 28 Trillion dollars as these politicians have bankrupted this country since we last balanced the budget in 2000. The Fed has propped up this economy with low interest rates and stimulus so eventually the damn will break and they are going to look for sources of new revenue. People who are setup to retire comfortably will be made the villain (even though they sacrificed to invest money throughout their 20’s, 30’s, 40’s and 50’s). Don’t put it past these people in Washington as they know how to scare the masses and get what they want.

[billphister]

This assumes that capital gains taxes will remain at current rates, which is by no means certain.

[robertgarcia]

After tax and or Roth 401k contributions grow tax free with tax free withdrawals. So no, a regular brokerage is rarely better.

[DavidSmith-wiic]

Jake, this was definately an eye opening video on the benefits of a roth vs traditional vs brokerage account. I especially appreciated the information on tax benefits of investing through a brokerage account vs traditional ira.