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What's a 401(k)?

Transcript

What's up Internet? My name is Ian Bloom and this is Nerd Finance. I'm your resident financial life planner and huge nerd!

So, our topic today is "What Is a 401(k)?" and in Nerd Finance terms 401(k)s are kind of like Spindas from Pokemon. They're all pretty much the same, but at the same time they're all a little different from one another. So, we'll cover them a little bit here, but ultimately, they're gonna be pretty unique to the one offered at your employer.

Section 401, subsection K, of the IRS tax code describes what a 401(k) is. So, the name is not very complicated. It's just from a document.

They are ultimately retirement plans with your employee contributions (from your paycheck) either on a deferred basis or an after-tax basis going to the 401(k), often with a match from your employer. I won't be covering the differences in a traditional or Roth 401(k) as much here> But ultimately, know that if you make traditional contributions your dollars are not taxed that day, but they will be taxed when they're withdrawn from the 401(k) later. And, if you make Roth contributions your dollars are taxed today, but will most likely not be taxed at withdrawal. So, depending on your tax situation, the advantages, and how long you have till retirement there are a couple of different ways you can handle it.

Most 401(k)s have different investment options - typically mutual funds. And mutual funds are very unique, kind of like baskin-robbins flavors, you can almost find a different one every time you look for them. The difference between mutual funds is ultimately not that great, and as long as you know what categories you're looking for you can probably select the options in your 401(k).

Know that if you don't select one there's often a target date fund which is a specific type of mutual fund that your employer put you into and those can be okay. They are based on the life cycle that you have, but ultimately, they're probably not the most efficient way for you to have your money invested. So, think about that and maybe work with an investment professional on how you should be allocating your 401(k).

All the money in your 401(k) is your money unless it was contributed by an employer and most of the time even your employers funds can be taken with you if you leave the employer (after a vesting period). Given that, you have the ability to move this money around if you should leave your employer and it's your money for retirement. That said, don't necessarily move your money just because you've changed employers. You'll want to know what the terms of the next employers 401k are, or what your other investment options available to you are out in the open market, before you decide what's best. So, doing some of that research can pay off pretty big.

The last question I get surrounding 401(k)s is "How much should I save?" and that's kind of a "Well, it depends." sort of thing. I can't really give you specific directions until I know your circumstances. Just like in strategy games, it's really hard to tell people what the best strategy is until you know what the enemy they're up against is. When you're looking at a financial plan there are different ways to tackle all sorts of issues and it's going to depend on what the circumstances of the individual are.

That said, there's a pretty good hard and fast rule that saving at least as much as you need to earn the match is probably going to benefit you in some way. Free money is free money, and you might want to take that from your employer.

There's a lot of layers to investing in 401(k)s and 401(k)s themselves, but I wanted to make sure to provide at least an overview here since they are a very common investment vehicle and people often ask me about them.

So that's all for today. Thanks for tuning in to this episode of Nerd Finance. I hope there was enough nerd and just enough finance in there for you - but if you have suggestions future videos, content you would like to see, comparisons you would like to see made, follow us on social media @openworldfp on Twitter and OpenWorldFp on Facebook and LinkedIn. You can also subscribe to this channel or check out our website at openworldfp.com. Thanks so much! Have a great day!