401(k) Nightmares: What They Don’t Tell You

I just watched this clip of Grant Cardone get into a heated argument with somebody else about 401ks and how they work and it left me a little concerned take a listen you don't pay any taxes when you sell when you when you pull out money out of your 401k if you wait until you're 63 when you start using that money you're going to pay taxes bro when you pull the money out and start using that money you're going to pay taxes you're not paying taxes when you pull money out of your 41 it it didn't you you weren't charged taxes while it sat there what's wrong with you 401ks are the most popular investment vehicle in the United States but the studies show that most Americans have no idea of how they work but that stops today because I'm going to be going over five things they need to understand about your 401k from your taxes to your fees because yes your 401k has a fee number three is control number four is limitations and number five alternatives to your 401k that way you don't make the same expensive mistakes that millions of Americans are making so let's jump in with number one talking about taxes your 401k lets you defer taxes it does not let you avoid taxes and the amount of taxes you're going to pay and when you pay taxes are going to depend on if you have a Roth 401k or a traditional 401K so let me start by talking about the traditional 401k if you make $1,000 from your job and then you put this all $1,000 in tier 401K that means all $1,000 gets to go in tier 401K the money then grows in your 41k for as long as your money is sitting there and then when it comes time for you to retire hopefully this $1,000 will grow to say $10,000 you pull out $110,000 out of your 401k that's when this money is going to be taxed so you get taxed when you pull the money out but all $11,000 gets to go into the 401K where the Roth Works a little bit different now you make that same $11,000 and you want to invest this money into 401K but before you do you pay your taxes so now the money is taxed before it goes in now depending on what your tax rate is meaning how much money you make you might be paying say 30% of this money in taxes so now only $700 goes into 401K so you have less money working for you but then when you go to pull this money out you don't have to pay any money in taxes when you pull this money out so if the $700 grows to $7,000 well now you don't have to pay taxes on the $7,000 because you paid taxes here before the money went into the 401 cake so you still have to pay taxes your 401k just said to defer taxes when the money is growing inside of the 401K with a Roth you pay taxes before the money goes in with the traditional you pay taxes when the money comes out now when you're making the decision of which one's better for you a traditional or a Roth the main question that most people ask is well when I go to retire what's my income going to look like I'm not going to have a job so I'm not going to have much income so my income is going to be lower so my tax bracket is going to be lower so because of that I should pay taxes when I pull my money out which might work for some people but for others that might not be the best analysis because if you are let's call it more financially Savvy and your goal is to grow your investment income and by the time you retire you don't want no income you want a lot of income well then you would have a higher tax bracket not to mention you want to pay attention to what's happening in the economy as well because we know that our national debt is always breaking new record highs and our government keeps spending more money which means our government has more and more needs for higher taxes which means that there's a potential reason to believe that we will have higher tax rates in the future which could impact how much money you pay in taxes again in the future but you got to pay attention to what you're doing in your personal finances and what's going on in the broader finances to decide what's better for you a Roth or traditional if it was me I would prefer a Roth but again I'm not you and I'm not a financial adviser I'm just a random guy on YouTube the second thing that you want to pay attention to are fees because yes your 401k is costing you a fee this fee is called an expense ratio so your homework after this video is take a look at what funds you're invested in with your 401k and take a look at what that expense ratio is because while it might not seem like a big amount of money it can add up to a lot of fees in the future because this fee that you're paying isn't a one-time fee that you pay today it's a fee that you pay on every dollar that you invest and every dollar of profit that you make for every year that your money is invested in your fund and this little fee can end up costing you tens of thousands or hundreds of thousands or even millions of of dollars in little fees that you can adjust just by paying attention to what the fees are so let me give you a little hypothetical let's assume that you're investing ,000 a month in your 401k and you're going to do this for the next 40 years and let's assume that your money is going to grow by say 10% a year on average if your expense ratio is 0. 07% that means when you go to retire your 401k would have right around 5. 2 million doll sitting there but if you have a little bit of a higher expense ratio say that your expense ratio is 0.

85% well now you're not going to have $5. 2 million you're not going to have $5 million you're not going to have $4. 5 million you're going to have around $4.