Description: The article below mainly talks about the topic on 401k. The author is going to go through all of the details and examples in order to show us how 401K works. The corporations will usually offer something as an incentive to the employee, so they can stay in longer periods of time.
401ks are so interesting, this is Sebastian Guerra from Guerra Financial Group and today I want to go through all of the details on how 401 Kings usually work, you see most 401ks are usually offered only through corporations, these corporations will usually offer this as an incentive to the employee, so they can stay in longer periods of time.
They know that if they offer them more benefits, the employee is not going to leave and these are things that companies don’t want to go through, they don’t want to go through another hiring process, because it’s very expensive.
So today what I want to go through is an example on how a 401k usually works, so for example, we have a person that is making $100,000 per year and this hundred thousand dollars the corporation that we’re working for is usually going to offer us a 401 K.
So inside this 401 K, we have the choice of depositing, however much money we want on a monthly basis or a bi-weekly basis, so we decide to deposit 10% of our income inside the 401 K.
The company is also going to offer us something called matching, not all 401ks have this option, not all corporations offer this to their employees, but what they do have is that they have a rule that says for every dollar that you put inside, we’re going to match you a certain percentage of your income.
So maybe the rule might say we’re going to match you per dollar up to five percent of your income, so if we have an income of $100,000 and we’re going to match you 5% of $100,000 dollar per dollar.
What that means is that they’re going to give us up to $5,000 per year, if we have a hundred thousand dollar income, if we decide to put in ten thousand dollars or ten percent and they decided to give us five thousand dollars, we now have deposited inside our 401 K fifteen thousand dollars for that giving here now very important to understand.
If I put in seven thousand or nine thousand or twenty thousand a year, that does not mean that they’re going to match us up to that same amount, it’s usually up to a certain percentage of your income.
Some companies might even say we’re not going to match you dollar per dollar, we’re going to match you maybe fifty cents for every dollar that you put in up to a certain percentage of your income.
Some companies might say we’re going to match you up to 6% or 7% of your income and there are some companies that might say we’re going to match you up to 2% of your income.
Then there are some companies which are going to say we’re not going to match you anything, we have a 401 K for you, if you want to put money in it, you could go ahead and do it.
These 401ks are usually invested in the stock market, we usually have mutual funds inside our 401 K, these mutual funds are extremely important to understand that they’re not free, they have something called fees.
The fees that they have could range anywhere between 2, all the way up to 4% per year, so if we have a 401 K with 5 to $10,000, we might be paying anywhere between 200 to 400 dollars a year in fees.
That’s a 401 K with only $10,000, can you imagine a 401 K with $400,000? we’re probably paying in fees, it can probably be 10 20 30 thousand dollars a year that we’re paying in fees inside our 401 K, so that’s why it’s extremely important to understand that maybe it’s not always the best option to be doing rollovers in tour leaving our funds inside our 401 K.
Maybe a better option is to rollover our funds to an account that doesn’t have to pay fees, we have more videos that talk about the rollover process and how it works now, the other thing that I want everybody to understand is these 401 K.
When you start making distributions out of the 401 K, it’s going to be a taxable event, so if we have inside our 401 K after 30 years of putting money inside, we now have five hundred thousand dollars and we now take out these five hundred thousand dollars after 30 or forty years of putting money inside.
These funds are going to be taxable, so if we have taxes up to 50% of the future out of these 500,000, the IRS is probably going to end up keeping about two hundred and fifty thousand dollars.
If taxes go up to fifty percent and for us, we’re only going to probably keep the other difference which is the other two hundred and fifty thousand dollars, so it is extremely important to understand how 401 k’s usually works.
Many people make a lot of mistakes, simply because they don’t know these rules, that’s why we offer all these videos so that you can learn, so you can understand all of the details that ends and outs of them, if you’d like to learn more financial strategies, please subscribe to our YouTube channel.