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The Truth About Your 401(k): Maximize Growth, Minimize Taxes
12 Plays17 days ago
Is your 401(k) working for you—or against you? 😬 In this eye-opening episode of The Future of Finance, hosts Marissa Wood and Lisa Green dive deep into the truth about 401(k) plans, Roth IRAs, and how to better plan for retirement.
If you’ve ever asked:
✅ Should I contribute more to my 401(k)?
✅ What happens to my 401(k)s when I change jobs?
✅ Should I open a Roth IRA too?
✅ How do I diversify for tax efficiency?
Then THIS is the episode you need to hear!
🔍 Learn about:
- The history & intent of the 401(k)
- Why too many people rely solely on it
- Roth IRA benefits for tax-free retirement
- What to do with an old 401(k)
- Tax diversification strategies
- SEP IRAs & solo 401(k)s for self-employed
⏱️ Timestamps:
00:00 – Intro to the Episode & Guests
00:36 – Who this episode is for: working professionals & business owners
01:26 – Why 401(k)s were created and what went wrong
03:00 – How 401(k)s became the default retirement plan
04:09 – Why relying solely on your 401(k) can be risky
06:00 – Common problems: lack of education, poor fund selection, no reviews
07:20 – How much should you contribute to your 401(k)?
08:19 – Qualified vs. Non-qualified investments explained
09:07 – Where to invest beyond your 401(k)?
10:08 – What to do with your old 401(k)s when you change jobs
11:26 – Benefits of rolling over to an IRA
12:26 – How we help clients consolidate and manage old plans
14:42 – Why the Roth IRA is your future tax-free best friend
16:20 – Roth IRA contribution limits and who should open one
18:28 – IRA, Roth, and non-qualified: understanding account types
20:18 – The importance of diversification in tax buckets
21:12 – Roth conversions explained (and when to consider them)
23:26 – Retirement planning for self-employed individuals
24:49 – Final thoughts: systematic savings, compound interest, and balance
25:37 – How to schedule a free consultation with Marissa or Lisa
📞 Ready to take control of your retirement planning?
Visit 👉 https://www.union-financial.com
📅 Book a free meeting directly through our calendar!
🔔 Don’t forget to like, subscribe, and turn on notifications for more retirement strategies, financial planning tips, and money mindset advice from financial experts who care.
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Transcript
Introduction to the Future of Finance Podcast
00:00:09
Speaker
Hi, welcome to the Future of Finance podcast. I'm your host, Marissa Wood with Union Financial Services. And today we're going to be talking about the truth about your 401k plan and some IRA tips, some frequently asked questions about retirement plans.
00:00:26
Speaker
And we are joined today with Lisa Green, my business partner. so welcome back, Lisa, to your second episode. you, Marissa. It's great to be here again.
00:00:36
Speaker
Thank you so much for having me.
What 401k Strategies and Alternatives Should Young Professionals Consider?
00:00:38
Speaker
So in our last episode, we talked about, you know, some retiree strategies. And now today we're talking about before you get to retirement.
00:00:47
Speaker
And, you know, this episode might be more geared towards the working professional, the younger family, the younger business owner that has a 401k or has an IRA and doesn't quite understand it.
00:01:02
Speaker
and wants to learn a little bit more about, should I be doing something else? You know, I have a 401k, I'm contributing to it, I think I'm maxing it out. Is there something else I should be doing? Is there a better strategy?
00:01:15
Speaker
And that's something that we hear a lot with the clients that we meet with on a daily basis. And so it's it's what I wanted to address today.
History and Popularity of 401ks
00:01:23
Speaker
And ah you can shed some light on um those strategies. Yes, thanks.
00:01:27
Speaker
So the 401k got started back in 1978, and it was a way for highly paid executives to save on tax dollars.
00:01:40
Speaker
That's actually how it was created why it was created. um They stopped the profit share. a lot of companies stopped profit sharing. Of course, the pensions have gone by the wayside.
00:01:53
Speaker
And the four l one k
00:01:57
Speaker
was started for a very specific reason. And now it seems to save on taxes. To save on taxes for highly i'm sorry highly paid individuals to save on taxes so that their contributions to that 401 will be tax deferred.
00:02:13
Speaker
So they didn't have to pay the tax in the the entire tax bill right then and there when they were getting their paycheck. ok Highly paid individuals. So it seemed to have worked very well in the very beginning.
Why Do Many Rely Solely on 401ks?
00:02:27
Speaker
And then it almost took on a life of its own, where every company was offering a 401k to every employee, which is great in moderation.
00:02:43
Speaker
Because the 401k now is seems to be the primary source of individual saving. Sometimes the only investment people Sometimes the only investment.
00:02:56
Speaker
And they continue to put more and more money into that 401k. Now, companies do match your contributions. The average is up to 3% of your salary.
00:03:08
Speaker
So we see people, well, I'm putting in 10% of my salary and getting that 3% match. Is that the right strategy?
00:03:19
Speaker
Sometimes, sometimes not. the The main issue, and i I'll jump a little further, when when when you just said it's the sometimes the only plan, the only investment that individuals have.
00:03:35
Speaker
And we ask our clients, we say, why is that? Mm-hmm. And they say, well, there's a number of reasons. My company offered it. I didn't know what else to do.
00:03:47
Speaker
It gets automatically deducted from my paycheck. And therein is the the driving force behind that 401k.
The Importance of Diversification in Retirement Savings
00:03:58
Speaker
Okay. Because if it's automatically removed, they're forced into saving. Yes. And they almost feel like if it's not deducted from that paycheck, they're going to spend it probably.
00:04:10
Speaker
Yes. Okay. That makes sense. it's so It's a wonderful option for some people that aren't disciplined. Okay. But When we see people that have all of their money in 401k or IRA, that money is then taxable when they go to withdraw it.
00:04:32
Speaker
Years from now, 20, 25, 30 years from now, do you know what the tax rate is going to be? No, I have no idea. Do you think it's going to be higher or lower?
00:04:44
Speaker
I have no idea. Could be higher just based on the trillions of dollars in debt the country he currently has. Right. so So when you put in money to a 401k and you systematically have that withdrawn from your paycheck, but you have no idea what it's going to cost you in the future when you go to withdraw it in retirement. Yeah.
00:05:12
Speaker
It could be a huge tax burden. good point. It's a very good point. And nobody seems to ah think about that. you know, what about my future? Imagine putting money into a bucket every week, every month, and not knowing if when you go to take that money out of that bucket, are you going to get half the money?
00:05:35
Speaker
Yeah, 70%, 60%, 50%, you don't know. Right. That's very interesting. interesting why would you put all of your savings into a vehicle that's going to be taxed at a future date at a rate that we have no idea what it could be?
00:05:53
Speaker
Well, the reason people put all their money in there is because they don't know about any other options. Mm-hmm. Mm-hmm. And a lot of people, too, that we meet with ah don't even really understand their 401.
00:06:05
Speaker
And that's it always drives me crazy meeting with clients and prospective clients that say, yeah, I have this with my employer. And I don't know. I just picked the target retirement fund yes because I have no idea. No one explained which mutual funds would be best for my risk tolerance.
00:06:21
Speaker
And I say, you know is anyone reviewing this with you on a quarterly basis or at least once a year? No. No idea. No. And, you know, that's problem number one, in my opinion, because, oh, my gosh, you know, that's that's sometimes a lot of money to have in an account that you don't even understand.
Employer Contributions and Balancing Investments
00:06:40
Speaker
But, you know, we do go over company retirement plans with our clients, even if we're not managing them and they're with an active employer. We will Walk you through which options that we think would be in your best interest, best risk tolerance. But yeah, so when we think about how much you should be contributing to that 401k plan, I know there's no magic number, but do you have a suggested amount that they should contribute?
00:07:08
Speaker
I like to suggest, now once again it depends on on your age and and how far out you are from retirement, but I like to suggest you contribute what that employer is matching.
00:07:21
Speaker
Because yes, that is free money. And by all means, take advantage of that. But there are other options that you can have, even if you, when we just talked about the automatic, systematic withdrawal of the paycheck going to the four ah one k well we're in an age where we can do that electronically say if you get your paycheck and you put in a thousand thousand dollars into your checking account Well, that money can be systematically withdrawn into an investment that is not IRA, tax-deferred money. Okay. You need to have a nice balance of qualified money and non-qualified.
00:08:07
Speaker
Non-qualified non-IRA, non-401k. Okay. non four a one k okay So qualified means designated for retirement, essentially. Yes, because you can't touch it until you're 59 and a half. That is the other.
00:08:20
Speaker
that's ah That can be a bit daunting for some people if they if they had intentions of buying a house and they've put most of their savings into their 401k. Yeah, we need different buckets of money. We need some that are going to be taxable in retirement, some that you can access prior to retirement, and then some that are going to be hopefully tax-free. Mm-hmm.
00:08:41
Speaker
And so say if we, you know, contribute, let's say they're matching 4% at a job. Okay, well, I'm going to contribute 4% because I know I'll be doubling my money just with that employer match, saving a bit on taxes now. But then, you know, with another 6%, 7% of my income, where should I be investing that? That's, you know, a question we get.
00:09:06
Speaker
That is, and that's a good question. And that's an individual appointment that will dictate what your situation is, what your goals are. Do you already have that house?
00:09:16
Speaker
Do you already have the cars that'll sustain you for five to 10 years? That's a very good conversation, but that is an individual conversation.
Benefits of Rolling Over 401ks into IRAs
00:09:26
Speaker
And once again, if you put all of your savings into that four ah one k It could be a problem in the future, and it could be a problem now if you needed to access it.
00:09:39
Speaker
Because there's no liquidity there. No, not at all. Okay. Not at all. And that's not why, the four as I said earlier, the 401k was not designed to be the primary savings tool that it has become. Mm-hmm.
00:09:54
Speaker
But now let's talk about when you leave that job.
00:09:59
Speaker
Yeah, so, you know, a lot of times you leave a position, you go to a different employer, and you're not fully retired yet. You're getting a new job. We meet with people all of the time that say, oh, I think I have 401k with a previous employer there and a previous employer there, and I can't remember even the amount or...
00:10:21
Speaker
who's managing it, I think I have one there. And it's it kind of gets away from you because a lot of people don't realize that when you leave an employer, It's in your best interest to roll over that 401k into an individual retirement account, an IRA.
00:10:37
Speaker
And that's something that we help individuals with every day because it's in your best interest. You know, the benefits of rolling over a 401k when you're no longer at that employer, well, first of all, you're going to have more investment options with an individual retirement account.
00:10:56
Speaker
Sky's the limit on the funds that we can invest it in. we're not you know, given one sheet of a few mutual funds at your employer to pick from, we can really get creative with designing a portfolio that's good for you.
00:11:11
Speaker
So more choices, you're going to have more control Most likely you're going to have someone actively managing it if you have a financial advisor. You know, it's not just thrown into a company plan where you're a number, not even a name.
00:11:27
Speaker
You're going to have that personal connection where an advisor will be actively managing it for you. And then you're also going to have more flexibility because say if you need to make a withdrawal from that account in the future,
00:11:42
Speaker
Once you're of age, you can choose your tax withholding amount, whereas whereas was a 401k, it's mandatory 20% must be withheld. And so it just makes sense. And plus, it's
Roth IRAs: Tax Advantages and Diversification
00:11:53
Speaker
organization.
00:11:54
Speaker
It's having that account consolidated with your other retirement funds. knowing where it is, ah keeping your beneficiaries up to date on that, keeping your address up to date.
00:12:07
Speaker
It's huge. And it's something that is probably the most common thing that we see. i agree. And now if someone has or they think they have 5, 10 years old from a previous employer Is that something that we could still help them roll over? course.
00:12:28
Speaker
Of course. Who initiates it? What's kind of the chain of events there? So what happens is, you know, first of all, when we meet with the client and we find out what their goals are, what their desires are, and what they want that money to do for them, then we can give them options to roll that 401k over into an IRA. It is a non-taxable event.
00:12:51
Speaker
Okay. It is a transfer directly from one company to another. The client never takes possession of that money unless they choose to, but then they're yeah at risk for taxable event.
00:13:04
Speaker
But we initiate the transfer paperwork. We take care of whether it's with Vanguard or Empower or Fidelity. We're so used to dealing with these companies and rolling over a 401k that it's second nature to us.
00:13:18
Speaker
And maybe at that time we can do something with that 401k that can provide that client with income down the road, what we talked talked about on a previous episode, that income-producing investment.
00:13:33
Speaker
that could be what would That could be a game-changer for somebody in retirement. or 10 years off from retirement, you say, wait a minute, that old 401k can provide me with income and in a few years from now when I do decide to retire and it and had just been sitting there?
00:13:52
Speaker
It's real nice. Yeah. That's it's a very nice option. But the point is, is like you said, people just tend to leave that 401k. And we've seen people come in with statements that they were never even opened.
00:14:06
Speaker
And they say, I don't know. It comes in the mail. I throw it in a drawer. I'm bringing it now to you. And we're happy to consolidate those old 401ks into one IRA and make it more tax efficient in the future.
00:14:21
Speaker
Because, you know, as we talked about, four one k IRA, you're saving tax now. but that future tax rate could be daunting.
00:14:33
Speaker
And if you intend on leaving that to ah beneficiary, there are specific rules on that now that most people aren't aware of. Yeah.
00:14:44
Speaker
And so, you know, if we don't want to put all of our money into a 401k or a tax-deferred IRA right now, What about using the you know golden Roth IRA that everyone says, you know get a Roth IRA. You might have heard this from your dad or your uncle or your neighbor or your friend.
00:15:05
Speaker
Whatever you do, get a Roth IRA. And I want to just explain in a real quick matter what a Roth IRA is and why they are so amazing. And so think of that 401k IRA that you're going to be putting money in now to save taxes on now.
00:15:24
Speaker
And then in the future, everything will be taxable. Now, the Roth is pretty much the opposite. And so the money that you contribute to a Roth is not going to save you on taxes today.
00:15:35
Speaker
if you're making $100,000 and you contribute $5,000 into your Roth, your taxable income is still $100,000. But that $5,000 Roth IRA contribution, let's say grows and grows and grows over the years. By the time you retire, $5,000 is now And that $50,000 account available to you 100% tax-free.
00:15:55
Speaker
hypothetically and that fifty thousand dollars account is available to you a hundred percent taxf freee The initial amount you put in all the interest is earned is available tax free in the future, regardless of what tax rates are.
00:16:11
Speaker
And so that is a great position to put yourself in for the future to have an account that you can access completely free of tax. um And so when we speak to people about putting your money into different buckets, You know, put some into the 401k or an IRA. And then, of course, you want to max out that Roth IRA any year that you can, that your income allows you to do so.
00:16:37
Speaker
um And financially, you can. But unfortunately, the limit is $7,000 year those under 50 years for those under fifty years old But if you can afford to do so, maxing out that w Roth IRA will do your future self such a favor.
00:16:56
Speaker
It's amazing. The Roth is an amazing investment. Yeah. and we do see a lot of people that... Unfortunately, they don't know that that's available to them.
Investment Strategies and Roth IRA Diversification
00:17:07
Speaker
They only know their company-sponsored plan. Well, we can open up a Roth with any of our investments, you know whether it's brokerage accounts or whether it's ah fixed index annuity.
00:17:21
Speaker
That can be titled Roth, and it grows and is withdrawn tax-free. Tell me that everybody should have that in their portfolio because it's going to be a godsend in the future where, once again, we don't know what taxes are going to be in the future.
00:17:40
Speaker
And to have that Roth investment that comes out tax-free is just a great thing. Absolutely. it's It's one of those things that every person should have and every young person has the capability and and the opportunity to get that going.
00:18:00
Speaker
Yeah, because it you know benefits you to have it invested for a long period of time to really take advantage of those tax-free earnings.
00:18:11
Speaker
And so the younger you could start, the better, of course. um And a quick misconception that I wanted to address is the Roth IRA or IRA or non-qualified is just the titling. It's the tax classification titling of an account.
00:18:29
Speaker
It's not the actual investment. Where it's invested depends on what your goals are. We can invest that Roth IRA or IRA in mutual funds, bonds, stocks, annuities.
00:18:43
Speaker
You can invest it in a CD or a bank account. You know, the holdings of that investment are dependent upon what your goals are, but the titling is what is a Roth IRA or a traditional IRA.
00:18:56
Speaker
um Because a lot of people will say, well, I have a Roth IRA and you know it does really well. Well, okay, where is it invested? What vehicle is it invested in?
00:19:08
Speaker
And so that that's what depends on an individual basis. But when we recommend a Roth, we're just talking about the tax classification of it. Right. And these are, you know we're going over things that We in the business think that the average person knows.
00:19:27
Speaker
And that's not the case. And we can't assume that people know what that Roth IRA does. One of the reasons that we're trying to explain it right now is that that Roth IRA will come out tax-free and you you will be happy in the future. You will think about this and say,
00:19:46
Speaker
I'm so glad I opened that Roth. Yes. as the As the tax rates might be 50% in 30 years from now. Yeah. But it's truly it's truly a great investment.
00:19:57
Speaker
And as we're talking about these different types, 401K, Roth, non-qualified, which is non-IRA. Non-retirement money. Non-retirement. Our goal is to get that word that you need diversification. Yes.
00:20:14
Speaker
There are multiple and types of investments available to everyone.
How Can Roth Conversions Aid in Tax Planning?
00:20:19
Speaker
And you can start a Roth IRA with $1,000. That's why I say most people can do that.
00:20:26
Speaker
you know if you If you don't you know spend money on coffee every day, you can do that. yeah ah So it's it's just the point is diversification, um different understandings of what your investments can do for you now and in the future is vital to everyone's financial future.
00:20:49
Speaker
Yeah, regardless of what age you are, you know, if you're in your 20s, 30s, 40s, 50s, 60s, older, you need to have diversification of tax classifications and investment vehicles, different risk tolerances, different levels of liquidity. We need money for now. We need money for later.
00:21:07
Speaker
And that's something that we do for our clients. Regardless of how much they're starting with, we're going to make sure that it's diversified properly. um And one other thing, too, I wanted to address is what a Roth conversion is, because some people might have heard of the term Roth conversion and...
00:21:25
Speaker
All that is is converting a traditional type of retirement account, 401k, something that you got a tax savings on by contributing to, converting that into a Roth where it will be tax-free in the future.
00:21:40
Speaker
And that event of converting from traditional to Roth is a taxable event. So if you're converting $10,000 of traditional money into Roth, that will be $10,000 of taxable income to you that year.
00:21:56
Speaker
You have to pay the taxes on it either now or later. So if you pay them now, you can then move it into your Roth. And, you know, Roth conversions are a great tool if you're concerned about taxes in the future or if, let's say, for some odd reason, one year you're in a low tax bracket.
00:22:15
Speaker
You want to take advantage of the fact that you're in a low tax bracket one year. We can convert a portion of that account a little at a time to not cause too much of a tax burden all at once.
00:22:27
Speaker
We can shave off a little bit at a time into a Roth. And not for everyone, but it is a strategy that we're using with a lot of our clients for the future. And, of course, that has to do with their accountant yeah as well. Yes.
00:22:40
Speaker
their tax advisor needs to be able to say, well, this is a good time. And then you know we can we can make that transition happen.
Retirement Options for the Self-Employed
00:22:51
Speaker
But of course, it's a tax question for their accountant that it probably would be a simple phone conversation.
00:22:59
Speaker
Shall I do this? And tax advisors love the Roth. Absolutely. Yes, they should. And we're not tax advisors. We don't give tax advice, but we do work with a lot of tax accountants, CPAs.
00:23:13
Speaker
We can work with the client's CPA. It's good for everyone to be on the same page because, you know, they're going to advise you, hey, contribute this amount this year to save on taxes. And we can make that plan cohesive.
00:23:26
Speaker
um And another thing, too, if you're not with a company that offers ah company retirement plan or a four one k let's say you're self-employed, we have a lot of entrepreneurial self-employed clients, you know, we understand because we're self-employed, there are investments such as the SEP IRA, individual 401k, where you can create your own retirement plan for yourself. Right.
00:23:55
Speaker
without a company, no, you won't get the match, but we can help you do so because you still do need to save for the future.
Key Takeaways on 401k Strategies and Diversification
00:24:04
Speaker
Exactly. um So that's kind of just a little bit of history on The good and bad parts about a 401k, the importance of rolling it over when you leave the job, how much we think the average person should contribute to their 401k, and then where else we should be investing that money besides your company retirement plan.
00:24:26
Speaker
And it can be systematically done just the way a 401k plan works with after-tax money, as we talked about. It can just come right out of your checking account directly into your investment vehicle.
00:24:40
Speaker
To stay disciplined. and Because that's what people need. Yeah. Yeah. That is what people need. They need to be able to get that investment going. And of course, the magic word of compounding, you know, that is so important. eighth wonder of the world. There it is. And and that's how you build wealth. Yeah.
00:25:01
Speaker
The compounding, you know, it's it's systematic, consistency, compounding, and then people your age can retire happy. Absolutely.
00:25:12
Speaker
Well, thank you so much for shedding some light on the history of the 401k and a couple of the strategies we use with our clients. And if you have a 401k plan with a previous employer,
00:25:24
Speaker
that you would love to learn about some options on rolling it over, a current employer that you just want explained better to you, or if you want to take advantage of that Roth IRA, we'd be happy to have a conversation with you.
How to Get in Touch with Financial Advisors?
00:25:36
Speaker
Feel free to go to our website, union-financial.com. Click on our schedule a meeting link. That'll take you right to our personal calendar to have a complimentary phone call or meeting with myself or Lisa, and we can help you have a better financial future.
Investment Advisory Disclaimer
00:25:51
Speaker
I'm Marissa Wood with the Future of Finance podcast, and I look forward to seeing you next time. investment advisory services offered through brook stone capital management lllc bcm a registered investment advisorr bcm and union financial services are independent of each other insurance products and services are not offered through bcm but are offered and sold through individually licensed and appointed agents the opinions expressed by marissa wood and guests on this show are their own and do not reflect the opinions of this radio station all statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such any statements or opinions are subject to change without notice
00:26:33
Speaker
Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone.
00:26:45
Speaker
Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned,
00:26:56
Speaker
please can please consult with a qualified tax or investment advisor to determine if it is suitable for your specific situation. This program is designed to provide accurate and authoritative information with regard to subject coverage.