5 Things To Know About Your 401(k) To Avoid a Retirement Disaster, According to Jaspreet Singh
Written by
Peter Burns
Edited by
Jasmine Browley
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
The most common type of retirement savings account is a 401(k) plan. However, in a recent study by Beyond Finances, 43% of the Americans surveyed didn’t know much about 401(k) plan at all.
Because of this, Jaspreet Singh, personal finance expert and host of the Minority Mindset YouTube channel, is out to spread awareness. In a recent video, he broke down five things the average American needs to know about a 401(k) plan.
Paying Taxes
Singh explained that a prospective retiree’s 401(k) allows for a deferral of taxes, but “it does not let you avoid taxes.” There are two types of 401(k) plans, each with a different tax advantage, he continued.
If you have a Roth 401(k) plan, you’ll contribute money you’ve already paid taxes on. When you withdraw your funds in retirement, you won’t need to pay taxes. The opposite is valid for a traditional 401(k) plan. Here, money is taken from your paycheck and added to the 401(k) plan before taxation. You then must pay taxes on your withdrawals in retirement.
Whether you should choose a Roth or traditional 401(k) plan depends on your preference. Many who think they will have a lower tax bracket in retirement opt for a conventional 401(k) plan.
Fee Costs
Even if you know how the IRS taxes 401(k) plan, you might not know about the fees. An expense ratio is the fee associated with a 401(k) plan and can cost you a lot if you ignore it.
“The fee you’re paying isn’t a one-time fee you pay today,” Singh said. “It’s a fee you pay on every dollar you invest and every dollar of profit you make every year that your money is invested in your fund.”
An expense ratio is your fund’s total yearly expenses, including distribution, management and other fees, boiled down to a small percentage you must pay. Singh explained that even though percentages like 0.07% and 0.85% might not seem very different, the latter will cost you hundreds of thousands or even millions of dollars more throughout your 401(k) plan.
Employer Match Terms
One popular reason many employees use a 401(k) plan is because of employer matches. A 401(k) plan match is when the employer augments the employee’s contribution to the fund, often by 100%. This is free money for the employee, but it doesn’t come without strings attached.
Singh pointed out that you may need to stay with your company for a while before you can keep your employer match.
“If you have to be at the company for five years to get that money, you want to understand that and not potentially lose it without knowing you’re going to lose it,” Singh said.
Decision Making
Singh wasn’t always a big fan of 401(k) plan because of the limitations on investment options. In individual retirement funds, you can make your own investment decisions. However, with 401(k) plan, your employer may give you a few options for funds you can invest in or choose for you.
While these limits discourage some, Singh thinks not having complete control is not a bad thing for everyone.
“Your 401(k) plan is a great place to start investing,” Singh said. “It’s not where you want to stop investing. This is your beginning-to-invest fund.”
Other Options
While a 401(k) plan is a great financial tool for saving for retirement, it is not the only one. Singh suggested understanding all the options to make the best decision for your future. Singh explained, “The three asset classes that have built more wealth than anything else in the United States over the last century are stocks, real estate, and businesses.”
Even if you invest in a 401(k) plan, it’s also essential to invest in other areas. Putting money into one of Singh’s suggested areas can also help you build wealth and fund your retirement.
More From GOBankingRates
