#016 | 401ks are your BFF!

Episode Summary 

Mike and Maggie talk about 401ks and 403bs, which are retirement savings plans.  We talk about the benefits of 401ks, the myths of 401ks, and we challenge people to, at the bare minimum, put in the amount their company is matching. And the best-case scenario you’re maxing it out to $19,500 (the max the IRS allows).  

Episode Notes

We start the episode with a discussion on how delicious Maggie’s chocolate protein smoothie is.  For those in suspense, the recipe is frozen bananas, chocolate protein powder, and soy/cashew/almond milk.  Maggie’s entire family loves it! Mike is underwhelmed.

401ks are tax-deferred savings accounts, which means contributions reduce how much of your income is taxable today, delaying your tax bill to the future when you withdraw it.  The idea is you save money now, it grows, and then hopefully you’re in a lower tax bracket in the future.  

Mike + Maggie’s overall advice on 401ks is:

• At the bare minimum you should be putting in the % that your company matches.  Most companies provide a specific percentage 401k or 403b match to their employees, and it’s a huge benefit that companies offer.  At the very least, you should be putting in the % your company matches, or you’re leaving money on the table that is meant to be part of your compensation package from your company.
• Even better is to max it out to the IRS limit, which is $19,500 in 2020 and typically increases each year.  
• The younger you are the more important it is to put money into your 401k as it’s going to grow more over time.  If you think you can’t hit the max, think about where your money is going and consider challenging yourself to limit your spending so you can afford to put more into your 401k.  This is a great example of delayed gratification.  
• The myths of 401ks:
• That you can only put in what your company matches.  Not true. You can put in up to $19,500 in 2020 if you’re in the US.  
• That you should have a specific balance by a certain age.  Not true. Listen and we’ll share why.  

Other topics we cover on this episode:

• Be careful about the timing of how you’re hitting the maximum amount vs. how your company pays out their match.  Most companies pay out the match per paycheck, so if you max out your 401k before the end of the year you could be missing out on the company match for the last paychecks of the year after you hit that max.  
• You can access and withdraw your 401k funds at the age of 59.5.  If you withdraw before the age 59.5, you’ll pay a penalty. If you withdraw after that age, you’ll pay an ordinary income tax as you’re pulling the money out.  
• The difference between 401ks and Roth 401Ks.  You’ll have to listen to this episode to get the details on this one.  

Our top 3 takeaways for this episode:

1. Participating in a 401k at the amount your company matches is the absolute bare minimum you should be doing.  
2. Try to max out your 401k to your IRS limit and start now as the younger you are the better.  Sacrifice now for the future. It might feel hard, but you can’t do it!
3. 401k is just one piece of your overall financial journey.  A 401k alone is not going to get you to financial independence, but it is one key piece.