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Let’s talk about 401lk. What is a 401k retirement plan, and how does it work? Some people believe that 401k is a great opportunity to invest for your future. The others say and BELIEVE that our 401k is about to be stolen by the big banks when the stock market crashes. Who’s right? Let's figure it out!
Let me share with you something really interesting and inspiring. This is the life expEctancy graph. As you see, life expectancy increases, year by year, which means that our chances to live a long life improve dramatically.
That’s really good, but! We have to figure out how to pay for basic necessities when we retire. And this is what retirement planning is all about? A 401k retirement plan might help us!
I watched some videos on YouTube, and I know that it might sound complicated, so let me explain it in simple terms.
This is John, John the plumber. John has a wife, two kids, a pet dog, and... a paying job.
John likes his job, he makes $50,000 per year.. he cares about his future because he’s hoping to live a long life, full of joy and unforgettable moments.
John works for “Super Duper Plumbers LLC”. His employer offers a 401k plan, which is a retirement savings plan for employees like John. In plain language, John can contribute a small portion of his income to his 401k plan.
John, as we know, makes $50,000 per year, before taxes. This is what we call a gross income.
He decides to contribute 4% of his income to his 401k plan. 4% of $50,000 is $2,000. John reports only $48,000 in income on that year’s tax return. It means that 401k contributions are tax defErred.
But what is really exciting is that both an employee (in this case John), and an employer (in this case, Super Duper Plumbers LLC), they both contribute to his 401k account.
John saves 4%, which is $2,000. And his company contributes the same amount – 4%, which is $2,000 as well. This means, that every year John saves $4,000, or 8% of his gross income.
Now you might have a question in your mind that is “WHERE does this money go, and WHEN and HOW will John be able to withdraw it”?
First, let’s talk about where the money goes.
In John’s case, there are two options available (this is what his employer offers). Fund number 1 consists of stocks, and Fund number 2 consists of stocks and bonds.
John believes in the American economy, he heard something about diversification, and he decides to go with the second option and to invest in stocks and bonds.
Year by year John contributes to his 401k plan. Year by Year his employer contributes to John’s 401k. And finally John is 59 and a half, and he is allowed to start pulling money out.
And it’s really cool because he has over 500 thousand dollars in his retirement account.
BUT HE OWES income tax on all his withdrawals – on the money he contributed and on the gains on his contributions.
Whatever he takes out of his account is taxable income, just as a regular paycheck would be.
And the problem with 401 k retirement plan and the reason why some people are not happy about it is… No one really knows what the tax rates will be in the future for anyone.
Nevertheless, 401(k) plans hold trillions of dollars in assets and represented nearly 18 percent of the $25 trillion in U.S. retirement assets.
Let’s go back to John.
Can he withdraw his money earlier, until he reached retirement age? Yes, he can, but there is an early withdrawal rule. John may have to pay an additional 10 percent tax on his withdrawal.
This is how it works, and this is a brief overview.
What about other employers? Every company offers its own 401k plan, with different investment opportunities – particular stocks, particular bonds, and so on. But the general strategy is: you invest a small portion of your money on a regular basis and benefit from this in the future.
Now the question: if everything is so good, why a lot of people prefer to stay away from 401k, why do they say that 401k does not work.
Well, there are a few reasons. And I mentioned before that no one really knows what the tax rates will be in the future.
The second reason is excessive fees nobody tells you about. And the third reason is paper dollars lose value and anything tied to them also lose value.
The conspiracy theorists believe that 401k is the way the government is going to steal your hard-earned money.
By the way, there is an opportunity to rollover your existing 401k plan to Gold IRA. Click the link below this video and get your free gold investment kit, and learn how you can protect your wealth in case of stock market collapses.
Who's right who's wrong? You decide. Let me know your opinion below.
Last Kiss Goodnight by Kevin MacLeod is licensed under a Creative Commons Attribution license (https://creativecommons.org/licenses/by/4.0/)