Personal Finance 401k Plans

BamaNation

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Apr 9, 1999
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As always, I offer no credentials nor am I a financial advisor. I do offer to the reader my own research and opinions which should be checked with your accountant or tax advisor and your own investigation before taking any actions based on this post or the links it contains. Caveat emptor!

OVERVIEW
This thread is meant to be a summary of information about 401k plans and provide some beneficial and informative links to good sources for further information and maybe provide some "Hey, I didn't know that about 401k's!" insight. It is not meant to be comprehensive and, as always, you should check your plan documents and with your plan provider for specifics to your situation.

SOME 401K RULES
This is not comprehensive, but does list a handful of the important rules:
  1. In 2020, your maximum individual contribution is $19,500 (or $26,000 if over 50 years old)
  2. IN 2020, the IRS also allows you & each employer to put a total of $57,000 (or $63,500 if over 50 years old). This means you can contribute, your employer can match your contribution, and your employer can contribute up to that limit.
  3. 401k limits are separate from other limits (457b, IRA, HSA, 403b, FSA, etc.)
  4. You are generally penalized if you withdraw funds before the age of 59.5. There are exceptions but you should consider your 401k investment to be to that age before you withdraw.
  5. You DO NOT have to withdraw or transfer funds out of your 401k if you change jobs. It may or may not be a good idea to transfer to your new employer's play but you should understand costs, options, etc. in BOTH plans before doing any transfers. Definitely DO NOT withdraw from the 401k just because you change employers. You will pay the IRS a penalty if you do so.
ADVANTAGES OF 401k (per Bogleheads.org)
  • Immediate tax break (contributions come out of check before taxes are withheld).
    • Simplified example: You are in the 20% tax bracket. You contribute $1000 per month to your 401k. Your taxes are reduced by $200. Thus saving $1000 only "costs" you $800.
  • Employer Matching (i.e. you contribute 5% of your salary and employer matches first 3% plus 50% of the next 2% so the amount you have in the 401k is now 5% + 3% + .5% + .5% = 9%)
  • Growth is tax deferred. This applies to dividends, capital gains, and other distributions. You don't pay taxes on these as you would in a taxable brokerage account.
    • Simplified example: You are in the 22% tax bracket (which means you pay 15% on capital gains). You contribute $1000 per month to your 401k and $1000 per month into your brokerage account. Your dividend yield in each account is 5% for the year. You now have $1050 in your 401k and $1,050-(50*15%)=$1,042.50 in your taxable account.
  • You can exchange funds and/or do buying/selling in a 401k account without having to pay capital gains taxes.
    • Simplified example: Assume you bought 100 shares of a fund that cost $10 on January 2, 2020. That fund goes up to $12 at the end of the year and you decide you want to sell it in the 401k account and buy a different fund because you want to re-balance your asset allocation. You can sell the old fund and collect $1,200 in the 401k account and buy the new fund without having to pay capital gains on the $200 gain from the sell.
    • HOWEVER, if you did this in your taxable brokerage account (and assuming you have to pay a 15% capital gains rate): You would end up with [$1,200-(200*15%)]=$1,170 in your taxable account.
    • Multiply these numbers by 30 years of transactions and growth and gains and the numbers become staggering: Imagine you have a 10% average yearly growth/return in the same two accounts. You sell both in 2050 (and are still in a 15% capital gain rate: Your 401k now has about $10,000 and your taxable brokerage has [10,000-(9000*.15)]=$8,650
  • You can usually contribute a lot more to a 401k than an IRA.
DISADVANTAGES OF 401k (per Bogleheads.org)
  • Generally penalty-free withdrawals are not available. Withdrawing before age 59.5 usually results in a 10% penalty
  • Fund availability and expenses may erode returns.
  • Employer can change funds and provider at any time
  • Not insured
  • Vesting of employer contributions may require longer-term commitment to company
OTHER 401K INFO
  • When employment ends at one employer, you don't have to rollover funds to the new employer plan. You do have options: leave money where it is, move to new plan, move to an IRA (called a rollover), take a distribution (possibly with penalty)
  • Required Minimum Distributions (RMDs) must be taken according to the appropriate IRS RMD table after age 70.5
  • After-tax 401k contributions are available at some employers.
  • Many plans do not provide indexing options that are low expense. Don't just accept this as something that is unchangeable.
  • You should advocate for your company to provide low-cost indexing options and an appropriate plan that meets your needs!
  • Solo 401K plans can be a great way to save more than the individual limit. Good for sole propritors, partnerships and some corporation structures.
LINKS
TideFans Personal Finance
[These links are also now under Personal Finance in the secondary navigation menu near the top.]

 
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4Q Basket Case

FB|BB Moderator
Nov 8, 2004
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As always, BN provides excellent information.

The most important thing is to get started.

1A is to have an honest discussion with yourself and your spouse about what’s a need vs. what’s a want. Does it keep a roof over your head, put food on the table, keep the utilities paid, and get you to work on time, or keep you equipped and looking the way your employer wants so that you can do your job effectively? Yes? Then it’s a need. Pretty much everything else is a want.

And don’t rationalize with yourself. Needing reliable transportation to and from work can come from a good used Toyota Camry. You don’t “need” a block-long F-250 with all the bells and whistles. A Timex watch will tell you the time. You don’t “need” a Tag Heuer or Rolex.

Next is to stick with it....No. Matter. What. One of the few exceptions is if you lose your income, or think you’re about to. That could be due to getting fired, downsized, laid off, your employer going under, or dealing with a medical issue for yourself, your spouse or your child. Then you stop investing, put that money aside for the impending rainy day, and start back up investing the instant your situation stabilizes.

Other exceptions are limited to keeping your house out of foreclosure, your car from repossession, the lights on, the IRS happy, and yourself and your spouse out of jail.

Yeah, that’s a pretty high bar. As it should be.

Increase your investment every time you get a raise or bonus. If your employer offers a 401k or similar investment vehicle, don’t think of yourself as “maxed out” when you contribute the most your employer will match.

You’re not really maxed out until the IRS won’t let you contribute any more. Even then, the IRA is still open to you. Even then, there are still taxable investment accounts.

Even if your employer doesn’t offer a 401k, BamaNation points out several alternatives.

”Needing” a trip to Disney World, ”needing“ to buy your 16-year-old a new car, and “needing“ a dream kitchen or backyard pool are not reasons to either reduce or stop investing. They are wants, not needs. If you can't maintain your investment schedule, and pay for the whipsy-doodle, you can't afford the whipsy-doodle.

Pay off your mortgage early. Have a 30 year note, but pay on a 15 year schedule. If you upgrade houses, keep your original target payoff date, and don’t reset to 15 years from the date of the new mortgage. If you can’t do that, you can’t afford the new house.

I know, I know, “Why would I pay off 4% debt when I can invest at 8% long term?”

Two reasons why: (1) are you really going to invest the difference, every single stinkin’ month for 180 months? Or are you going to inevitably find some other “necessary” use for it, “just for now....I / we deserve that”?

And (2) it assumes a smooth exponential 8% return on your investments. Which doesn’t happen in the real world. It’s a sawtooth, with a definite upward bias....but a sawtooth path to getting there. And if it happens to be in a downturn at your target date, your fundamental assumption falls on its face, your investments are down, and you’re still cracking that nut every month.

I’m telling you, the feeling of liberation that first month when you have no mortgage payment is better than any drug in the universe. It’s more money available for investing. Or, if you’re truly maxed out on your investing vehicles (see above for a reality check on that), it really is fun money.

But better than that....it’s guilt-free fun money because you’ve already laid a fantastic financial foundation.

It’s all about delayed gratification.

The cool thing is, if you do this from age 22 - 42, you’ll be able to have all the toys starting about then.

As Dave Ramsey says, “Live like nobody else [for a while], so you can live like nobody else...for the rest of your life.
 
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UAH

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Nov 27, 2017
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Pulled this graphic off an investment analysis I received yesterday. Some of you may have an interest.
Market Cap Comparison.PNG
 
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BamaNation

Publisher and Benevolent Dictator
Staff member
Apr 9, 1999
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When you have HUUUUUGEEE profits you get that market cap. These are HUUUUUGEEE companies and the 5 you point to have incredible growth, as well, for large companies, because they offer tomorrow's technologies in one way or the other, so they have today's profits and growth PLUS tomorrows profits and growth priced at a premium. PLUS they've been hugely profitable over the last 6 months when others have struggled to grow or profit so they are being rewarded all the way around. It's amazing there are FOUR TRILLION dollar companies of those 5. FB is about 680B.

The others are really solid companies all the way around. Well managed, good dividends, profitable , growing (for the most part), etc. Which means they're probably under priced right now. One can choose to figure out which firms are underpriced OR one can buy the whole market and capture the market return (which beats active trading / funds about 85-90% of the time over the long term). I'm not smart enough (and don't have ESP) so I choose the latter.
 
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