Jaspreet Singh: Be Aware of 4 Surprising Ways Your 401(k) Could Cost You Money
Written by
Ashley Donohoe
Edited by
Rebekah Evans
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The Investment Company Institute shared that roughly 70 million working Americans were participating in 401(k) plans in September 2024. This type of retirement plan is popular for benefits such as high contribution limits, potential free money and different tax perks.
However, money expert Jaspreet Singh said that many people don’t know enough about 401(k) plans, so they’re at risk of making costly mistakes and missing out on opportunities. In a YouTube video, he explained four 401(k) catches to watch out for and some alternatives that could help you get rich.
Income Taxes
“Your 401(k) lets you defer taxes; it does not let you avoid taxes,” Singh said.
If you’re putting money in a traditional 401(k), you avoid the taxes now, but the IRS still makes you pay them on both contributions and investment growth once you start taking money out in retirement. A Roth 401(k) is different since you pay taxes in the contribution year but avoid taxes on withdrawals (including growth) in retirement if you meet the IRS Roth rules.
Whether you have both options depends on your employer. While Singh said he favored Roth accounts, he advised thinking about your expected current and future income and tax rates to figure out which 401(k) option leads to lower taxes. He also mentioned that the government could raise tax rates by the time you retire, so consider how all financial factors impact you.
Potentially High Fees
If you’re not checking your 401(k) documents, you might not know what’s going on in terms of fees. Singh discussed how it was important to check your 401(k) terms for the expense ratio since this costly charge isn’t just something you pay once.
“It’s a fee that you pay on every dollar that you invest and every dollar of profit that you make for every year that your money is invested in your fund,” Singh explained.
While the fee might seem small, Singh showed you could spend thousands to millions over the years. He gave an example of contributing $1,000 per month for 40 years at a 10% return. You’d have $5.2 million with a 0.07% fee versus $4.2 million with a 0.85% fee. This showed the importance of comparing your investment fees to your returns.
Employer and Wall Street Control
Singh discussed how 401(k) accounts offer less control due to employer rules and limited investment choices. This could lead to losing money or missing higher-earning opportunities.
While employer matches are appealing, they can leave you tied to the company for years to start earning or avoid losing matches already earned. Singh advised knowing the company’s vesting schedule. The IRS gave examples of cliff vesting, meaning you suddenly own all contributions after a few years and graded vesting, where you incrementally own your employer’s contributions.
Also, your job’s 401(k) usually only lets you put contributions toward funds and not specific companies or other investment types you want. Singh gave an example of investing in real estate funds with a 401(k) but not physical properties. This can limit your potential returns.
Diversification Limitations
“This is that tax-deferred account to get you started with your investments, but this should not be your only or sole investment fund,” Singh explained.
Even if you’ve got multiple types of funds, Singh explained that your diversification options are limited. Since 401(k) investments are tied heavily to the stock market’s ups and downs, you risk more than if you had more diverse asset types. Singh recommended having some investments outside your account to better balance that out.
Some 401(k) alternatives he discussed include getting an IRA or self-directed brokerage account to buy stocks or exchange-traded funds (ETFs), purchasing rental properties, starting a company or investing in someone else’s private company. These options involve different risks, tax consequences and returns, so carefully research your options and consider a financial advisor’s advice.
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