The latest episode of "The Capitalist Investor” podcast with hosts Luke and Tony dove into some critical financial topics, focusing mainly on common 401(k) mistakes that investors make. Here are the five hot topics they discussed that are poised to help listeners navigate their retirement planning:
1.New Show Structure for Concise Financial Tips: Tony introduced a new format for the podcast, aiming for shorter, more frequent episodes. Instead of lengthy discussions, the episodes will be about five to seven minutes long and released three times a week, targeting Monday, Wednesday, and Thursday releases. This change is designed to fit the listeners' busy schedules better, allowing for quick, digestible insights into the financial market and investment strategies.
2. Acknowledging 401(k) Fees and Limited Investment Options: A significant portion of the discussion revolved around the two main challenges of 401(k) plans: limited investment choices and overlooked fees. Tony highlighted that most 401(k) plans have an average fee of around 1%, which often goes unnoticed by participants. They advocate for more transparency in these fees and consideration of investment options, potentially through a brokerage link to expand choices.
3. The Importance of Employer Match Contributions: The hosts stressed the critical mistake of not contributing enough to receive the full employer match in a 401(k) plan. This employer match is often viewed as "free money" that can substantially enhance one's retirement savings, and failing to take full advantage of it is a common and costly error. 4. Leveraging In-Service Distributions for Investment Freedom: For participants over the age of 59 and a half, in-service distributions allow for the movement of funds from a 401(k) to an IRA without closing the original 401(k) account. This can provide a broader range of investment options and eliminate some of the administrative fees associated with 401(k) plans.
5. The Peril of Leaving Old 401(k) Plans with Previous Employers: Tony conveyed the disadvantage of leaving old 401(k) accounts with previous employers, comparing it to leaving personal belongings behind when moving houses. The hosts recommend consolidating these plans into a current employer’s 401(k) or rolling them into an IRA. This strategy not only simplifies one’s finances but could potentially reduce fees and provide more control over the investments.
Listeners are encouraged to check back on Monday for the next episode, which will continue the discussion on financial strategies while also looking at upcoming bank earnings and how they might set the stage for future market expectations.
Welcome to this week's episode of the Capitalist Investor. It is me, Tony the Tiger. Yeah, we got Luke. Cool hands, Luke. What up? And we're missing d on assignment. And so it's me and Luke today. So I think you. Let's just hit on real quick first, I think you won the golf. I think you called. Yeah, I had a nice, I had a nice sized bet on Scotty Scheffler. You know, his betting odds. You're like Dave Portnoy. He like, put like 400 grand on him and won like 2 million. Yeah, but I got Scotty at like nine to one, several weeks ahead of the Masters. Yeah, that dude probably got him at like four to one. You beat port. No, I, man, I did. I did. I just. Too bad you didn't. Wish I had a couple more zeros on my pet and it would have been nice, but no, I. It's very difficult to bet on golf clothes. Like, very difficult game to play and to be consistently winning. Like, it's just, you know, even when Tiger was back in his heyday, I mean, he didn't win every tournament, but felt like it. So one thing we talked about before is I think we're going to change the structure of the show. So, Tony, you want to hit on that a little bit for our viewers and listeners? Yep. So we're going to mix up the show just a little bit, and what we're going to do is we're going to have more episodes, but they're going to be shorter. They're going to be more maybe five, six, seven minutes long, but we're going to have them about three times a week. This way you can hear, listen, move on. Hear, listen, move on. Right. Get on with your ten minute drive in the morning to work. Put it on every. So I think Monday, Wednesday and Thursday is what we're planning on releasing each one. So we'll keep the structure. You'll hear it Thursday morning tomorrow, which is recording the day before, but you're also going to hear it when you turn on our podcast on Spotify or iTunes on Monday morning and Wednesday morning next week as well. Yeah, I'll let the, I'll let the smarter people in the room figure out what day they're going to drop. But drop the mic. Drop. Drop that information on you guys. All right, so today's podcast, we're going to talk about the three common 401, 401K mistakes. And the reason I say this is that, you know, first and foremost, a 401K is, is the, the best way to accumulate growth while you're working it is. It. It's. It's probably the one of the very few tools that you have, but it's the most effective because you can pile the most money in there on a tax deferred basis. And the only problem is, is that, you know, I see two headwinds with it. Right. And a. Two headwinds I see are that usually there are limited investment options, unless maybe you have a brokerage link or whatnot. And the average fee that people sometimes don't realize is around 1% to have the 401K provider charges. And sometimes it goes under the radar. I'm like, I don't see any fees. And, like, believe me, there are, you know, we have software in our office to where we get to look at the administrative fees that are behind the scenes. And you'd be surprised. You know, they range from maybe a half a percent all the way up to two, but the average is somewhere around one. And what's. What's the value you're getting out of it? Like, if you're paying mutual funds, if you're paying the plan administration fee 1%, you might be paying 2% then at that point for the funds and the plan fee, it's like, what exactly are you getting? Financial planning advice? Well, are you getting tax planning advice? Well, you're not might. It's a tool to accumulate money. That's what it is meant for. Because you can pile in 24 grand a year. If you're over 50, you can put in over 30 grand. And regardless of how much you make, it's tax deductible. Where in a traditional IRA, you're kind of capped at seven grand, eight grand. That's what those people don't realize. And then you might not be able to deduct it. Everyone gets to deduct the 401K contribution. Right. Right. And if it's on the traditional side, I mean, obviously, you can contribute to the Roth and not get the deduction. But, yeah, you hit on the key point there that mounts, I think, six grand for an IRA, if you're below. 50 in 2024, it's seven grand under 58 grand if you're over 50. Right. And then for an Ira, traditional Ira. But then you're capped once you make over, like, 120 grand. I don't know the exact number off my head, but once you make over 120 grand, you are not allowed to deduct that contribution anymore. And then the 401 ks have, like, a $30,000 or$30,500 limit, I believe if you're over 50 years old to contribute. If you're under 50, it's like $24,000. Exactly. Yeah. So like that, that's like three, four x the amount of money you can put into 401 ks, which is why, like you said, it's one of the biggest tools and everyone does get that deduction. Right. One of the other benefits is, you know, we're very bad savers in America. Right. So when you see that direct payroll contribution go to your 401K. If you don't have the, see the money hit the account, then you're not going to be spending the money because it's not in your account. Right. So like, it's just the direct payroll contributions allow you to stay disciplined easier, right? Yep. So just so everyone knows, the contribution limits are $23,000 for 401 ks in 2024. And if you're over the age of 50, you get to put in an additional seven grand. So 23 and 30. Right. But we want to talk about the mistakes, you know, like we are bad savers, but the 401K is the best place to save it. But it's also, you know, we can get it deducted. Obviously we get deducted from our payroll. Right. Because then if I don't touch it, I won't spend it, maybe. Right. So biggest thing, the biggest mistakes is first of all, you're just, you, you know, not contributing, you know, and here's a, here's the thing. Most employers should be having some type of match. Whether you got a safe harbor or, you know, they give you$0.50 on the dollar, up to 6%, whatever they might do, right. You have to contribute up to the match. Go get the free money. It's not rocket science. Go get your free money because that is again, an accumulation wealth. You know, they always say like, don't pick your job based on benefits sometimes, but that's one of the biggest. Like, you know, benefits are a huge part to your retirement or health insurance, whatever it be. Like, those are big players in the game. And if you get 3% match, I mean, 3% more money every single year over 30 years could double your money. Exactly. Right. Right. So if I put in $10 and my, my employer kicks in an additional three, that's 30% more money I'm saving. Right. No brainer, got a met. You got to contribute up to the match. You have to get the free money, guys. Next thing is in service distribution. Most people aren't aware of this, but typically after the age of 59 and a half, you're able to move the money out of your four hundred one k and put it into an IRA that does not close out your 401k. You can see you can continue to contribute, but the pros for this would be that, first of all, we're getting more investment options. You can invest in anything you want in your IRA. Anything, right? Bitcoin, gold, whatever, you name it. All Luke's favorites, right? But you're also now eliminating the fee, right? Because there is no fee in an IRA. IRA stands for individual retirement account. It's your account. You now have control of that. So you got to be smart with it. You know, you don't wanna put all your money and be like, oh my God, I got this hot stock tip from the taxi driver. You don't wanna do that, right? But we want to be able to have just more sophisticated investment options in an IRA. That is what's available to you. Well over 59 and a half, you're able to take that money out, do a direct rollover, there's not a tax consequence, and get it into something that you can control and just have more options. The thing that concerns me when you leave your money in a 401K, if I was above the age of 59 and a half, is if we had a 2008 and 2009 scenario when the employers locked up their 401 ks and make them accessible and didn't allow people to go access. That's their, their own money. Because it's not your own money if it's in a, or 457 or all these different tax codes, right? So Ira, like you hit on, stands for individual retirement account. It's your money. So outside of just the optionality of the investments or saving the money, I just like knowing the peace of mind that I have my money in my own control. Yeah, you have control. And you know in your 401k, you may lose control because of the plan. Provisions may limit you from taking the money out. Especially like you use the example, 2008 markets down 40 grand or 40%. A lot of people wish they were only down 40 grand back then, but. The reason they locked this down is because that means they would have had to liquidate the funds and make that money available to you. And these funds are like, that's a behavioral finance error, like we do. We're not going to sell at the bottom, lock in our losses, we're going to not give your money to you. Sorry. So, yes, that is definitely another pro. I would say the biggest con, I mentioned it before is that if you put the money in your IRA, it's your responsibility to invest it. Don't make bad decisions, right? Or limit them or whatever you want to say. But, like, that's the con. Like, it's on you now to make that money grow. But you do have every investment under the sun that you can invest in. And then the third thing, the third mistake is that leaving your old 401 ks at your old employer. You know, it's so funny. I see, you know, anytime I meet with a new person, occasionally I will see somebody where they're like, man, they got four old 401 ks just floating out there. Like, who's watching this stuff? And I'm like, I just left it over there. And I left this over here. Get it out of there. I always use the thing when we teach our educational classes is, how many have you moved from house to house? And everyone virtually raises their hand and be like, did you leave your furniture at your old house, or did you take it with you? Everyone? Yeah, I took it with me. Well, do that with your 401k, either. Move it to your new 401k. My fiance, since my ex girlfriend bought my furniture move, I don't think she. Wants to take the furniture because I can only imagine. Yeah. So not everybody, Tony. Well, are we gonna have a big burning party of all your old furniture? Like a big bonfire, maybe even the house. So, you know, if you have an old 401k, either consolidated into your new 401k or maybe even do the. I think the more efficient thing is move it to an IRA. Right? You know, move it to a traditional IRA. If you have Roth money in there, move it to a Roth IRA, but don't let it float out there. Consolidation is very important because, again, it just consolidates the sophistication of your investment strategy. So, sophistication. So that's all the name of the game. That's what we're trying to. That's what we're trying to drop. Anyway. We're trying to keep these below ten minutes. So we wrap this one up. Tune on in in a couple days when we release the next one coming up on Monday. This is a Thursday podcast, so tune in Monday morning. You'll be able to see another ten minute episode. We'll be hitting on more financial planning, corner things, but also some more market takes as well as I think bank earnings coming up is going to be a topic coming up as well sets the stage for the future of earnings. Yes, sir. All right, great. Well, we'll catch you at the next episode. Have a great day, guys. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.