Hey guys, it's Suzanne with Arvabelle. In this video we're going to talk about
Hey guys, it's Suzanne with Arvabelle. In this video we're going to talk about

401(k)s. I would always hear people talking about 401(k)s and I was like, what is that? What what does it do?
401(k)s. I would always hear people talking about 401(k)s and I was like, what is that? What what does it do?

I don't understand. How do you adult?They didn't teach us this in school.
I don't understand. How do you adult?They didn't teach us this in school.

So we'll just go over what a 401k is and some of the pros and cons of these accounts and how you can take advantage
So we'll just go over what a 401k is and some of the pros and cons of these accounts and how you can take advantage

of them to start putting your money away and
of them to start putting your money away and

saving for your future when you are an old little person that needs some money
saving for your future when you are an old little person that needs some money

If you're new to the channel, be sure to subscribe. We talk about money, mindful living, and things that you didn't learn in school
If you're new to the channel, be sure to subscribe. We talk about money, mindful living, and things that you didn't learn in school

Just to give you a general understanding
Just to give you a general understanding

401ks are types of retirement accounts
401ks are types of retirement accounts

So if your employer is giving you a 401k you can think about it like they're giving you a
So if your employer is giving you a 401k you can think about it like they're giving you a

basket and you can put your money and different
basket and you can put your money and different

investments in that basket and grow the things inside of it through compound interest
investments in that basket and grow the things inside of it through compound interest

If you don't know what compound interest is just explaining it super quickly in the next like five seconds
If you don't know what compound interest is just explaining it super quickly in the next like five seconds

It's basically instead of letting your money sit in a bank account
It's basically instead of letting your money sit in a bank account

hopefully by
hopefully by

investing it, that money will make you extra money. And that extra money will make you even more money on top of that
investing it, that money will make you extra money. And that extra money will make you even more money on top of that

and so on and so on. The general idea of a traditional
and so on and so on. The general idea of a traditional

401k is that you're putting in money now and you're putting off paying taxes on it
401k is that you're putting in money now and you're putting off paying taxes on it

until you take the money back out when you're 59 1/2 or older
until you take the money back out when you're 59 1/2 or older

You can choose to put a percentage of your income into this account
You can choose to put a percentage of your income into this account

Whatever amount you choose will be deducted from your total taxable income
Whatever amount you choose will be deducted from your total taxable income

So for example
So for example

If you make $100,000 and you contribute 5% or $5,000 to your 401k your total taxable
If you make $100,000 and you contribute 5% or $5,000 to your 401k your total taxable

Income will be $95,000
Income will be $95,000

You won't pay taxes on the money that you put into your 401k
You won't pay taxes on the money that you put into your 401k

until you take it back out. And when you do take it back out, it will be taxed as regular income
until you take it back out. And when you do take it back out, it will be taxed as regular income

I do want to bring up the importance of having an emergency savings fund. When you put money into these
I do want to bring up the importance of having an emergency savings fund. When you put money into these

retirement accounts, the money isn't as accessible
retirement accounts, the money isn't as accessible

There will be a fee to get it out before the required age. If you try to withdraw money from your 401k account before you're
There will be a fee to get it out before the required age. If you try to withdraw money from your 401k account before you're

59 1/2
59 1/2

they will hit you with a 10% fee and you'll see have to pay taxes on top of that
they will hit you with a 10% fee and you'll see have to pay taxes on top of that

So if anything happens
So if anything happens

before you retire and probably something will happen your car will break down or you'll get sick or something - something in your life will happen
before you retire and probably something will happen your car will break down or you'll get sick or something - something in your life will happen

So it's good to have an emergency fund so that you're not hit with unnecessary fees from trying to withdraw from retirement accounts
So it's good to have an emergency fund so that you're not hit with unnecessary fees from trying to withdraw from retirement accounts

So, like I said, you can withdraw money from your 401k
So, like I said, you can withdraw money from your 401k

Once you hit 59 1/2 and you won't be hit with that
Once you hit 59 1/2 and you won't be hit with that

10% fee. And once you hit age 70 1/2 you have to start taking mandatory distributions
10% fee. And once you hit age 70 1/2 you have to start taking mandatory distributions

which just means that you have to start taking money out of your 401k. The advantage of a 401k account
which just means that you have to start taking money out of your 401k. The advantage of a 401k account

is that usually your employer will match the amount of money that you put into the account up to a certain percentage of your income
is that usually your employer will match the amount of money that you put into the account up to a certain percentage of your income

So for one-to-one matching for every $1 that you contribute, they'll contribute $1. For every
So for one-to-one matching for every $1 that you contribute, they'll contribute $1. For every

$1,000 you contribute, they'll contribute $1,000
$1,000 you contribute, they'll contribute $1,000

They'll usually do this up to a certain limit. So that may be up to like 5% or 10% of your income
They'll usually do this up to a certain limit. So that may be up to like 5% or 10% of your income

But not every company will match one-to-one. Some will say for every $2 you put in
But not every company will match one-to-one. Some will say for every $2 you put in

we'll put in $1. For every $4 you put in, we'll put it in $1
we'll put in $1. For every $4 you put in, we'll put it in $1

It really just varies. In most cases people like to try to max out their contribution
It really just varies. In most cases people like to try to max out their contribution

So meeting that maximum point where their employer will stop matching
So meeting that maximum point where their employer will stop matching

So if your employer is offering to match up to 10%, and you're only putting in 9%
So if your employer is offering to match up to 10%, and you're only putting in 9%

You're leaving an extra 1% on the table
You're leaving an extra 1% on the table

Like that's just free money that you're leaving
Like that's just free money that you're leaving

Take it
Take it

And of course if you want to go over the amount that they match you can. It's just when it hits that certain percentage
And of course if you want to go over the amount that they match you can. It's just when it hits that certain percentage

they'll stop contributing money to your account. You can contribute up to the limit that the government sets
they'll stop contributing money to your account. You can contribute up to the limit that the government sets

So I think in 2019, it's $19,000. And that number is higher if you're 50, and it changes occasionally
So I think in 2019, it's $19,000. And that number is higher if you're 50, and it changes occasionally

So it's just something to check.
So it's just something to check.

Now Roth 401k's are still relatively new, but they are becoming a more popular option that employers are offering
Now Roth 401k's are still relatively new, but they are becoming a more popular option that employers are offering

So basically, it's the same as a traditional
So basically, it's the same as a traditional

401k, but it has some of the benefits of a Roth IRA which I will talk about in Thursday's video. So subscribe
401k, but it has some of the benefits of a Roth IRA which I will talk about in Thursday's video. So subscribe

When you contribute to a traditional 401k, which we just talked about, your contributions are pre-tax
When you contribute to a traditional 401k, which we just talked about, your contributions are pre-tax

So like we said you put in the money
So like we said you put in the money

And you won't be taxed on it until you take it back out
And you won't be taxed on it until you take it back out

But with a Roth 401k your money goes in after taxes
But with a Roth 401k your money goes in after taxes

So that means that you pay taxes now, but when you take the money back out
So that means that you pay taxes now, but when you take the money back out

Whatever you put in and whatever amount your money grew to, you get to keep all of it. Just for comparison
Whatever you put in and whatever amount your money grew to, you get to keep all of it. Just for comparison

let's say that by the time you retire, you have $1,000,000 in your account. If that's in a Roth
let's say that by the time you retire, you have $1,000,000 in your account. If that's in a Roth

401k that money's yours, you get to keep it, you can go party in Florida or...I don't know - wherever old people go
401k that money's yours, you get to keep it, you can go party in Florida or...I don't know - wherever old people go

If the $1,000,000 is in a traditional 401k, you will still need to pay taxes on it
If the $1,000,000 is in a traditional 401k, you will still need to pay taxes on it

So I'm just throwing out random numbers
So I'm just throwing out random numbers

but if you have a 20% tax that means that of the 1 million dollars, you'll have to give
but if you have a 20% tax that means that of the 1 million dollars, you'll have to give

$200,000 of it back to taxes
$200,000 of it back to taxes

There are several advantages
There are several advantages

to a Roth 401k if your employer offers it. In addition to not paying tax on what you withdraw
to a Roth 401k if your employer offers it. In addition to not paying tax on what you withdraw

there's really not a way to predict with certainty what tax bracket you'll be in when you retire or how tax
there's really not a way to predict with certainty what tax bracket you'll be in when you retire or how tax

percentages will change in the future. With a Roth 401k
percentages will change in the future. With a Roth 401k

those tax changes won't affect you since you already paid taxes on the money before you put it in
those tax changes won't affect you since you already paid taxes on the money before you put it in

There are a few more things to know about
There are a few more things to know about

Sometimes employers will offer profit sharing in their 401ks instead of matching. And what that means
Sometimes employers will offer profit sharing in their 401ks instead of matching. And what that means

is that instead of matching a dollar amount that you put in, they'll put in a certain percentage of the company's profits
is that instead of matching a dollar amount that you put in, they'll put in a certain percentage of the company's profits

In your offer letter, or in the wonderful 50 page packet that you'll get, you may also see something about vesting. That's vesting, not
In your offer letter, or in the wonderful 50 page packet that you'll get, you may also see something about vesting. That's vesting, not

investing. Vesting means that the company's contributions to your account are basically locked away for a certain amount of time
investing. Vesting means that the company's contributions to your account are basically locked away for a certain amount of time

So if they tell you that there's a 4 year period before you're fully vested
So if they tell you that there's a 4 year period before you're fully vested

That just means that you can't take out the full amount that the company has contributed to your account until after 4 years have passed
That just means that you can't take out the full amount that the company has contributed to your account until after 4 years have passed

So if you quit your job, the money that you invested from your paycheck - that's yours
So if you quit your job, the money that you invested from your paycheck - that's yours

But you do need to find out what your employers
But you do need to find out what your employers

vesting policy is. So still using the 4 year example, with some companies if you quit before the 4 years
vesting policy is. So still using the 4 year example, with some companies if you quit before the 4 years

You won't get any of the money that they contributed to your account
You won't get any of the money that they contributed to your account

Or they may have a plan that increases the amount that you are vested in your plan by a certain percentage each year
Or they may have a plan that increases the amount that you are vested in your plan by a certain percentage each year

We'll use 25% as an example. So if each year it increases by
We'll use 25% as an example. So if each year it increases by

25% it'll take four years for you to be fully vested, and for you to get the full amount that your company
25% it'll take four years for you to be fully vested, and for you to get the full amount that your company

contributed. If you leave your job after two years you'll be only 50%
contributed. If you leave your job after two years you'll be only 50%

vested which means that you'll only get to keep 50% of what your company put into your 401k
vested which means that you'll only get to keep 50% of what your company put into your 401k

Most employers will offer plans that are mutual funds made up of stocks bonds, etc
Most employers will offer plans that are mutual funds made up of stocks bonds, etc

You do want to look at the package that your company is offering and watch out for
You do want to look at the package that your company is offering and watch out for

excessively high management fees. If your account isn't growing that much, but the management fees are super high
excessively high management fees. If your account isn't growing that much, but the management fees are super high

you probably won't really be making much money
you probably won't really be making much money

Also if you're moving between companies
Also if you're moving between companies

you don't necessarily have to withdraw the money and pay that 10% penalty
you don't necessarily have to withdraw the money and pay that 10% penalty

There are usually ways that you can rollover your 401k to a new company
There are usually ways that you can rollover your 401k to a new company

so that's something to ask your employer about, ask a financial adviser about, and
so that's something to ask your employer about, ask a financial adviser about, and

see if that's something that you need to do or that you're interested in doing. Ask lots of questions
see if that's something that you need to do or that you're interested in doing. Ask lots of questions

do your research talk to your employer,
do your research talk to your employer,

if you have a financial advisor, find out about your specific account,
if you have a financial advisor, find out about your specific account,

their requirements and regulations, and do your research so that you can decide which account aligns with your lifestyle and your
their requirements and regulations, and do your research so that you can decide which account aligns with your lifestyle and your

financial goals. If you found this video helpful
financial goals. If you found this video helpful

be sure to give it a like, subscribe, visit our blog Arvabelle.com, follow us on Instagram
be sure to give it a like, subscribe, visit our blog Arvabelle.com, follow us on Instagram

And I will see you on Thursday to talk about Roth IRAs
And I will see you on Thursday to talk about Roth IRAs