The TRUTH about your 401k

According the US Census Bureau, 49% of adults age 55–66 had zero personal retirement savings in 2017. That is a lot of people that simply will not have the choice to retire and will have to keep working.

But there is hope on the horizon, in 2022 passed the SECURE act, with a provision that employees will be auto enrolled the 401k system and will have to opt out of the program rather than opt in. Hopefully this will increase the number of people that have something put away for retirement.

• A business will match a percentage of your contributions.
• This money will be invested in stock or bond asset that will increase the balance over time.
• The tax benefit. Deferred tax payments and income tax reductions.

Both of those states have a higher taxes than other states. Investments made into your 401k account reduce the amount of your taxable income.

Along with a Health Savings Account.

The average worker can contribute up to $19,500 worth of their income into this system. Those investment gains can really add up over time. And then if you are a worker and receive a raise or increase your salary, your employer will contribute more to that 401k account.

There is no free lunch. Especially with a 401k.

The 401k business is lucrative for 401k providers, mutual fund operators, publicly listed companies and the US government.

• If you invest assets into a 401k you better believe there are going to be number of fees that you are required to pay.
• 4 Types of fees - Investment, Administrative, Individual, Custodial

You will lose a good amount of money, possible $100,000 or more, from your investment gains, because of the fees that they require you to pay for the privilege of putting your money in a 401k.

The biggest fee is most likely going to be Asset/Revenue Sharing fee. The 401k provider will charge a fee based on the amount of assets that you have on their platform which will grow over time as you add more money to the 401k and the investments inside the 401k grow.

Everyone is taking a cut.

You will pay a fee to the 401k provider.

Each mutual fund you invest into has a fee you will pay. Each business inside the mutual fund has employees and management that will take their salary. You as the investor will be paying these fees.

But those fees may be worth it to pay in order to reduce your tax burden if you fall into a higher tax bracket.

Your investment options will go through 2 layers before you get to decide which investments you are going to choose. Your 401k provider and your employer.

What you might not know is that 401k providers receive a payment from mutual fund operators to be included on the list of 401k options. Which could be justified, because both the mutual fund operator and the 401k provider are providing a service to you, the consumer.

There are many laws around 401k mutual funds. They have to ‘high-quality’ determined by the government and the 401k provider. The 401k provider will curate a list of mutual fund investment options for an employer to choose from. Then the employer will select which options they would like to include in the list offered to employees.

The list of options is usually not very long, but it depends on the 401k provider and employer how many options you as investor get to choose from.

The government will eventually receive their tax income, just not today. The government actually just pushed back the withdraw age to 72. The idea is that during your working years you will be in a higher tax bracket and when you retirement and no longer have an income you will be in a lower tax bracket.

You also get to keep your money invested and growing larger, because you keep that tax money you would have paid.

Except that more and more people cannot afford to quit and retire when they reach 60–70+. So not only are you paying tax on your current income, but also tax on your RMD’s and you will need to withdraw more money in order to pay for expenses and the tax burden.

Again, this might be worth it to avoid having a higher tax burden.

This is what I think is the biggest drawback of the 401k system.

401k money is designed for you to use in retirement. You have money put away in a 401k and you receive social security to take care of you in old age.

But a lot of things happen in life between the ages of 20 - 60.

If something horrible happens to you then there is an IRS penalty of 10% for taking out money before retirement age. If you want to retire early or quit a terrible job, do not expect to use the money you earned without paying a penalty. There are a few exceptions you withdrawing money from this account. And you could take a long out against your 401k. But that is not wise.

If you want to invest in the market, but use the money when you need it, it is better to invest in a traditional stock market account.

Everyone benefits a little bit form the system.

• Workers get to reduce their tax burden and invest money for retirement.
• Employers get to offer employees a ‘perk’.
• 401k providers make a bundle, which does provide workers jobs.
• Mutual operators make a fee.
• Mutual funds get more assets to manage, which makes them more money and creates a number of jobs.
• Public companies receive more investment from the mutual funds.
• The stock market receives a steady investment of funds into the market every month.
• The government receives guaranteed regular tax payments from retirees in the form of RMDs. And it is encouraging people to save and invest for retirement outside of social security.

If you are in California or New York, you should max it out to reduce your taxable income.