Knowledge is the first true investment. It breaks down fear, Opens the door of Opportunity, and Leads to multiple streams of Automatic Wealth.

Welcome back to The Neighborhood Finance Guy (#TNFG) website where we break down money concepts while Making Money Make Cents. This article will show you that every decision isn’t binary. On the contrary, there are multiple triggers and unforeseen cause and effects.

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Table of Contents

Background

While the 401k (403b and 457b equivalent) is one of the best available retirement saving options for many people, only 32% of Americans are investing in one, according to the U.S. Census Bureau (as of 2017).

63% are confused by them and their benefits.

It’s easy to see why there is a sentiment that 401ks have failed Millions of Americans. Of Course, it does if over 50% don’t understand it.

At the peak of the pandemic shift by mid-April 2020, employers started to cut back on matching contributions and employees cut back from investing their respectively plans as well. A fraction of savers took the maximum available, according to plan providers.

While 2% of participants at Vanguard took a Covid-19 distribution through May 31, 2020. 4% of these people withdrew the full $100,000. They took the cash at a loss before the v-shaped recovery. *Panic/Fear Selling

Key summaries:

In 2020, the IRS contribution limit to a 401k, 403b, or 457b plan is $19,500 (see prior years below).
There is a catch-up limit increase up to $6,000 for those over 50 years old.
Teachers (generally) with access to a 401k and 457b can invest in both, because a 457b plan is considered a non-qualified retirement plan. Simply 457b plans aren’t part of the same tax code as the 401k and 403b plans which are collectively limited to $19,500. With this nuance, that’s a grand total of up to $39,000 tax deferred in one year (and up to $51,000 for those over 50).
The CARES Act of 2020 allowed savers to withdraw up to $100,000 from their 401k and waived the 10% early withdrawal penalty if they’re under age 59½. Taxes still apply to the amount withdrawn, however you can spread the bill over three years.
Think of it like getting a bonus from your job, it’s still taxable in the end at your normal tax rate. Many will cry from this colossal mistake in 2021.

401k – Past Contribution Limits Cheat Sheet

Doubling Wealth: One Decision, Multiple Impacts

“Just as ripples spread out when a single pebble is dropped into water, the actions of individuals can have far-reaching effects.”
Dalai Lama

Not sure when it happened to us, we started to believe that our actions functioned on a binary system, like walking into a room and turning on the lights.

Life is far more complex. Think of the Butterfly Effect.

Maybe you decided to take High School Track as a hobby which led you to a passion that eventually placed you on the Olympic center stage.

Maybe you didn’t and instead went home to hang out with friends.

One simple decision would have costs us, Usain Bolt. That moment when he became the fastest man on Earth that went on to start a movement would have never happened.

That’s the complexity of our world. Without Arthur Ashe, we don’t have the Williams sisters. Without Serena Williams, there is no Naomi Osaka. In that way, every decision we make has a long term impact.

Contributing to my 401k was one of the best decisions that I ever made.

Over 6 years, my total wealth output grew by $120,500+ that’s beyond my direct contributions of $98,133. Current 401k total is $144,567 as of 10.18.2020

I’m doubling up on my wealth as time goes on.

Bonus Effects: 6 -Year Investing in my 4010k

Matching Contribution at 5% on average $5,000 per year	$30,505
Tax Avoidance Savings on avg. $17,775	$13,739
Investment Growth at 8%+ through 90/10 Stocks to Bond Allocation	$29,759
Student Loan Payment reduction due to AGI at $400/month for 5yrs	est. $24,000
Misc. Phase Outs, Increases in Tax Refunds, and Home Deposit	est. $22,500

Total	$120,503

$120,503 plus my own contribution of approx. $98,133, that’s $218,636

1. Never Leave Free Money on the Table

“Around one-third of employees don’t contribute enough to their 401(k) to get their company match, according to Vanguard’s How America Saves 2019 report”.

If your employer offers FREE money always take it. It makes no sense if you don’t.

Employer matching contribution is not taxable to you and adds to your retirement savings plan based on the amount of your annual contribution. Some are flat percentages, i.e. 3% across the entire office.

Others companies may even match your direct contributions through a dollar for dollar match, up until a certain threshold. For example, 4% of your salary or up to the amount that you are contributing.

It’s important for you to read the terms and understand.

My 401k Contributions since 2014:

Year	Direct Contributions	Matching Contributions	Total Contributions	End of the Year	Growth or Losses
2014	$3,142	$2,750	$5,892	$7,034	19.38%
2015	$6,359	$3,325	$ 9,684	$16,976	1.54%
2016	$13,632	$3,991	$17,623	$35,946	3.89%
2017	$18,000	$4,724	$22,724	$52,713 Withdrew $15,000	-10.15%
2018	$18,500	$4,993	$ 23,493	$68,418	-10.22%
2019	$19,000	$5,272	$ 24,272	$111,331	20.11%
Est. 2020	$19,500	$5,450	$24,950	$158,397	16.23%
Total	$98,133	$30,505	$ 128,638

Total 401k Growth Based on my Contributions: 61.41% in Dollar Value = $60,264

2. Are You Vested?

It’s important to understand the vesting schedule for employer contributions. A lot of people don’t know that they might be on a vesting cycle.

That new job might be enticing but some people run and lose out on as much as $20,000 if only they stayed an extra two months. A typical vesting period for employer 401k contributions is anywhere from three to five years.

3. Did You Rollover your 401k Yet?

Gone are the days of gold watches and endless pensions. Nowadays if you are leaving a Job, make sure you decided how your 401k plan rollover from your old employer.

9 out of 10 times, you secret hate your old job because your new job pays you more so why would you leave your money idle with you ex. Play some Mariah Carey (90s) or Cardi B, and do something about it? There are three ways that this can go.

Leave it there?

That’s the easiest thing you can do especially if it’s being managed correctly with the proper risk tolerance allocation and maybe for less fees than your new employer. Is it cheating? Not really.

Low-cost plans with great investment options are hard to come by. While you won’t be able to contribute anymore funds, the prior money will still grow. If you have less than $10,000, stop being petty and move out.

Rollover your old 401k into your current 401k

This is the least complicated approach since you are just jumping ship and coming with new money. It’s a great way to keep all your money together. The process can take a while so don’t hold your breath. Just talk to your new HR and check over all the policies.

Rollover an old 401k to a new IRA

This is the most modern option since it gives you more flexibility as to how you invest your money. That non descriptive growth plan of $20,000 can now be dumped into TESLA. Just know that you also accept all the risk. If you rollover from a traditional 401k to a Roth IRA, you will pay taxes. You have been warned.

4. You Made a Deposit but what’s the Allocation?

There are a bunch on people in the US making blank deposits into the employer plan with no allocation.

Translation, Money is seating there confused.

It’s not just dump money into a 401k, you need to direct your money so that it is doing something.

Some employers are small and might not offer a lot of options but nothing is worse than investing in the bond fund for 20 years at 1% while your coworkers are netting 8-30% in the market. Yeah you might be safe and insulated from market turbulence but it’s like being stuck at the entrance for 20 hours after you paid for your admission to Disney. There is a whole park.

It’s your responsibility to ensure you are allocated based on your risk profile.

Time to let it Play Out

So what happens is simple but complicated, so just follow along for now.

Tax avoidance. You investments in to your 401k are tax deferred and thus help you avoid taxes in the present. For example, let’s say your salary is $79,500 in 2020 and you contributed $19,500 with a 4% matching of $3,180; you would only be taxed on $60,000. The difference from $79,500 – $19,500 = $60,000 you avoided around $2,340 at 12% tax rate.
Next up Growth. That $22,680 from your contributions and matching grew by 10% in 2020, that’s an additional $2,268 or a new total of $24,948.
TNFG Kick Flip – With you higher refund of let’s say $2,000, you should to invest that in an HSA or IRA in 2021 for the prior year which also boosted your refund by 10%.
Student Loans – in a federal income driven repayment plan, it is all defined by your AGI. Your new AGI for lowering your taxable income would reduce your payments according.
Spoils of your Efforts – your $19,5000 contribution in your future yielded at least 4 concurring events valued at the minimum of $9,178.

All of it seem confusing, but truly let It play out so it can all click together.

Summary

Set audacious goals and work on them constantly. That’s how you change yourself and that’s how you win. If you want to know more about our technique, check out the Net Max Financial Plan for Couples.

Our Net Worth is up almost $400,000. My 401k is up to $150,000. Even if we did nothing more than ride the wave for the next 25 years, see the results for yourself below. We just have to hope that the Biden Tax overhaul isn’t as bad as predicted.

For us, it’s not just about paying down debt but to really use time to help us propel our wealth higher with more velocity. We will likely the ½ Millionaire marker by June 2021. A far distance from struggle city of Negative $125,000 in 2014.

We are aiming to prove that it’s possible to normalize wealth for regular folks. You can do it to.

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