Ep 52: Counterintuitive Advice: Why You Should NOT Invest In A 401(k)

Ep 52: Counterintuitive Advice: Why You Should NOT Invest In A 401(k)

Don’t get us wrong. In many cases, your 401(k) can be your best investment vehicle, offering numerous benefits and tax advantages and many times a 100% return on some of your contributions (also known as an employer match).

However, it's important to recognize that it might not always be the optimal choice for everyone. Join us in this thought-provoking episode as we dissect the reasons why someone should NOT invest in a 401(k).


We guarantee you'll walk away from this episode with an enriched understanding of 401K contributions and strategies, including when it might not serve you to contribute. This episode is a deep dive into the mechanism of employer matching contributions, the advantages it offers and the tax implications that surround retirement investments. We shed light on the criticality of thinking pragmatically about your investments and the importance of self-regulation. This is not just a discussion about making wise financial decisions, but also about taking control of your financial future.

Transferring an old 401K? Working with an advisor for more investment options? We've got you covered. In this episode, we also explore the untapped potentials of a Roth option, the benefits of having an emergency fund and why sometimes, paying off high-interest debt might serve you better than contributing to a 401K. Remember, the road to financial success is paved with informed decisions, and we're here to guide you on that journey. Don’t forget to swing by GreenWayWealthAdvisory.com and subscribe to our podcast.

Full Transcript

0:00:00 - Speaker 1
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Inc. A broker-dealer member, finra, sipc Advisory Services through Cambridge Investment Research Advisors Inc. A registered investment advisor Cambridge and Greenway Wealth Advisory are not affiliated.

0:00:20 - Speaker 2
It's time to dive into some insider secrets of investing and retirement planning. To make your retirement as smart and as elegant as possible. This is Money Chic with Sherry Rash.

0:00:31 - Speaker 3
Welcome in to another edition of the podcast. It's time for Money, Chic Women and Money, where we talk about well concepts around money and investing, finance, all sorts of good stuff. So we try to have some good conversations with Sherry Rash on this and, of course, Sherry is a financial advisor and money coach at Greenway Wealth Advisory. And let's go around we're going to go a little counterintuitive advice, Sherry. We've got to get a little, I don't know, controversial.

0:00:56 - Speaker 4
Yeah, contrary, yeah, this is exciting. Obviously we're not going to. This is not advice to not invest in the 401K, it's just other things to think about.

0:01:05 - Speaker 3
So Ponder yeah, so we're going to talk about maybe why not putting money in the 401K could be a good idea. Or maybe not putting as much as you are right, so it just kind of depends, so yeah.

0:01:15 - Speaker 4
I just have my compliance officers Like I know they're just shuttering right now or freaking out if I'm saying I'm giving advice to not contribute to a fork. So it's just ideas, Just things to think about.

0:01:27 - Speaker 3
And we'll set it up in kind of a story-ish context. I think I got a good way of doing this, I think. So hopefully we'll make the compliance people happy and we'll just kind of talk about this in the aspect of you know. Just some other things to ponder. So, and again, don't get us wrong, in many cases your 401K can be your best investment vehicle. You know, offers numerous benefits and tax advantages, many times 100% on return, depending on things that are going on right, like basically aka known as the employer match, right. But there just could be other times when maybe it's not the optimal choice to be pumping in as much as maybe you're pumping in. So let's just kind of go through this a little bit. We've probably beat it to death already, so let's just jump in and talk about it.

First of all, how are you doing? You doing all right.

0:02:06 - Speaker 4
I'm good, happy summer.

0:02:07 - Speaker 3
Yeah, really for sure. It's, uh, at least the middle of June when we're doing this podcast, so I think it's just officially summer's just around the corner even though we, we all. We all treat it like Memorial Day is summer, so I don't know why that's the kickoff to summer.

I don't know why we don't just make it that, but anyway, uh, all right, so let's, let's jump in here. I want to start actually, I'm going to re-change the order just a little bit, Sherry. I'm going to start with the second one on my list, because I think that's where we can kind of start with maybe just the not right off the bat. Yeah, if your employer does not offer you matching contributions, you're not basically getting the free money Then maybe it's not a good vehicle at all for you. Uh, a little controversial there, because you could look at something else like an IRA or a Roth, right you know. So that could be an option if there's no match involved.

0:02:52 - Speaker 4
Yeah, I, I love this conversation. I had this conversation the other day with my client who is nearing retirement. She's a few years out and she is maxing out her 401k. She's doing the catch up, all of that, but her employer has not provided a match in years.

0:03:10 - Speaker 3

0:03:11 - Speaker 4
And um, which we'll we'll talk about this in a minute but All of her money is pretty much in retirement assets, meaning she still has to pay taxes on that money. So I asked her I'm like, why, why? And she's like, well, because that's what you're supposed to do. I said, yes, for some reasons, but those reasons may not necessarily benefit you. You're not getting a match. We don't necessarily want to keep on having a big pile of money that you're going to have to pay taxes on soon. So why are we doing this?

0:03:45 - Speaker 3
And if there's no match, right yeah, if there's no match.

0:03:48 - Speaker 4
And you know you can get their investments are fine within it, but we could get good ones elsewhere. So, and she had never even, it never even occurred to her that she should pause or stop her 401k contributions because of the lack of a match and the direction we're going to take her money tax wise going forward. So, yeah, I mean, if your employer doesn't match and and I would say you have the diligence to continue saving, so because now instead the money is going to hit your paycheck right, you need to still have the control and the restriction on yourself that I have to invest this. I'm just using a different vehicle right for it.

It may not make sense because, like you said, it's 100% return right. If employers matching what you're putting in, you're already getting an automatic return on your investment.

0:04:43 - Speaker 3
Depending on whatever their setup is right, right, exactly. So, kind of using that thought share here as we move through the rest of these. So let's say, let's say you know company matches is I don't know a lot of times what's 3%, 6%, something like that, right?

0:04:57 - Speaker 4

0:04:57 - Speaker 3
In many places. So you got to at least do. Let's just say it's six, so you've got to at least put six in to get the company match. Well, you certainly should do that if it's available, because that's free money, right? So in that, in that instance, maybe then, and for the scenario let's say you're putting in 12% total to your 401k from your paycheck, but you're only getting the match up to six and to your point, there's some other reasons why maybe that extra 6% you could put it into a different account or go someplace else with it. It may be better served for your unique scenario. You're still getting the free money, but you're maybe putting that extra 6% someplace else. So let's kind of use that as the kind of like the back of our mind thought for the conversation. So, with that said, maybe it's because you don't have an emergency fund, right? So maybe you're pumping in 12% total in your 401k, but you got like 500 bucks in your savings account and that's just not going to get it done if something catastrophic happens, right?

0:05:49 - Speaker 4
Yep, yeah, I mean when I'm working with my clients, especially during my financial foundations program, which is 10 items that everyone really needs to have buttoned up and a handle on in order to build wealth. Step one is have a fully funded emergency fund, because if something were to happen to you, you would then have the cash on hand to take care of it If an emergency were to happen. You know HVAC and something wrong with your house. Whatever, you have the cash on hand, you don't have to bring on debt in order to take care of this emergency. So, mark, in your example right there, if you have 500 bucks in your savings account but you have a fully funded 401k, that's your little off as far as the percentages go, because your emergency fund isn't close to fully funded and you'd have to take out a loan from your 401k and or withdrawal and penalties and taxes in order to access your money.

0:06:47 - Speaker 3
Right, absolutely, and you don't want to tap into that if it's not necessary. So that's just again another example as to why it could be worthwhile to maybe scale down what you're pumping in and look at something else. Another one might be the tax. Let's just talk about that one. You mentioned it a couple of times already. So if you're doing a traditional 401k you mentioned that with your other client you're basically deferring and, you know, punting the tax conversation down the road. Well, maybe it's worthwhile, while the taxes are low, to consider putting, instead of the, you know, taking that six extra six and putting it into a Roth. Right, because then you can pay the taxes now you're still saving for your future, but you're not, you know, kind of waiting to see if the tax rates are going to go up, which you know more than likely they are.

0:07:29 - Speaker 4
Exactly so when the benefit of contributing to a 401k is that it reduces your taxable income. If you make $100,000 a year, you contribute $10,000 to your 401k. Your income then is bumped down to 90,000 for purposes of reporting, and that's even before benefits and all of that stuff. So, yes, that is a tax benefit, but then that $10,000 that you're contributing to your 401k is invested and growing tax deferred, which then means you have to pay taxes on it at a later point in time. So, believe it or not, we're in a low tax environment right now, and I'm not a betting person, but I would bet tax rates are going to go up, especially when I'm retired, but I would even say in the next handful of years. So you're deferring taxes now, when tax rates are low, and if you believe tax rates are going to be higher, even if you continue your salary being the same exact amount, your tax rate could end up going up. So you're deferring to pay more taxes in the future, which does that necessarily make sense?

0:08:39 - Speaker 3
Maybe not Well, and so let's throw this little wrinkle into the conversation too, sherry is that with the passing of the Secure Act 2.0, many more companies are going to be doing well, they've made it so, where now the match can go into a Roth and many more companies are going to be adding that on. I think it's 2024 when that piece has kind of rolled out.

0:08:58 - Speaker 4
That is amazing. I mean, that is just. I have goosebumps. That's just amazing. I mean, can you imagine it's free money that you never have to pay taxes on? It's just, it's crazy, it's awesome.

0:09:10 - Speaker 3
So that's a great little vehicle and a wrinkle that they're adding in. And also, you know, the Roth 401K is now becoming more and more prevalent at other jobs as well, right, so it's worth while to maybe ask your employer if maybe switching from the traditional 401K to the Roth 401K is an option, and then this just kind of reframes this whole conversation, right? So and get another reason why maybe investing in a normal, traditional 401K isn't the best option to that point.

0:09:39 - Speaker 4
It may not be. Most people have their, their net worth, tied up in the equity of their home and their qualified retirement plan, usually pre-tax retirement plan. So in order to access your net worth, you have to take out an equity loan right or sell your home and take out the equity, or withdraw from your 401K, which is potential taxes and penalties. There's no other. You need to diversify the taxation of your money and a raw. If your employer offers a Roth 401K, obviously speak with your financial advisor or reach out to me if you're curious, if it makes sense to you, but many times it does because also with the Roth 401K there's no income restrictions, where a regular Roth IRA does have an income restriction for contributions.

0:10:28 - Speaker 3
Yeah, so they've married the two right. So they've got some of the advantages of the 401 and in the Roth and they've kind of married the two together and I get it's. It's been around since 2006. It's rolling out in more and more companies all the time. So it's something to certainly ask about. But in the, in the concept of what we're talking about today, is, you know, alternate reasons as to why to look someplace else other than just the four, the traditional 401K? Another one might be Sherry, if you, if you are no longer at the company but your money is, don't, don't leave it back there.

0:10:57 - Speaker 4
Don't leave it. Bring it. Bring it at a minimum, bring it with you to your new employer. But you know, ideally, if you can roll it over into an IRA so you can diversify your investments, expand the investments that you're, that you have access to get advice on it. Yes, definitely bring it with you. Yeah, bring it to the party. Right, don't leave it behind.

0:11:18 - Speaker 3
So well, let's let's go ahead and talk about that one, actually, since you mentioned it. So control I think that was kind of kind of be my last piece, but we'll just go ahead and jump into it right now. I think the control word works the best as to maybe why to look at something else other than you know. Just a 401K, outside of getting that free money match right so to your point. In that situation, if you move an old 401K from an old job or whatever, you just have more options and flexibility and control and just all those things seem to make a lot of sense to me.

0:11:49 - Speaker 4
Right. I mean, when you sign up for your 401K or you look at your investment options, it's usually a pretty short list that you have to choose from. Some people like that because it could be overwhelming if you have a long list of investment options. But again, bringing it, working with an advisor opens up that world of way more investment options for you. But an advisor can also, based on your time horizon, your risk tolerance, what you're looking to achieve with this money can direct you as far as investments that may be appropriate for your situation. So give you more control, but also doesn't give you the burden of having to make all of those decisions which can be overwhelming.

0:12:29 - Speaker 3
Anything else I missed. I think we've covered some good ones here. I mean, we've talked about an emergency fund. If you you know, maybe not pump so much into the 401k, if you need to shore up that emergency fund, or if you know you're worried about future tax increases, maybe look at something you know the Roth option right, if you're no longer there, you've got an orphan 401k left behind. We've talked about control. Anything else I missed?

0:12:49 - Speaker 4
I think the last one is if you have a lot of debt. If you have a lot of debt and you're, you know, contributing a lot to your 401k, you know that means obviously less take home money. So is your debt, or do you have extra money to pay towards your debt to get rid of it?

0:13:05 - Speaker 3
Oh, yeah, that's a good point. Yeah, because, like, especially with the interest rates right now, right.

0:13:09 - Speaker 4
Right, I mean in the market. You know, historically returns about 7% on average a year. Some years it's 25%, other years it's negative 7%. But odds are, you know, on average a 7% rate of return your dollar would go further, potentially getting rid of your debt if you have a high interest rate. So if you have a match and contribute up to your match any more than that, maybe think about redirecting it to your debt to get that. You know, get that off your back, not have to worry about it and have your dollar work for you a lot harder.

0:13:45 - Speaker 3
There you go. So I say I think we did pretty good. I don't think we went too far out of the spectrum. There it's again. It's a great vehicle here. It can be really useful for people. And if you're doing nothing else, then please, you know, be paying your future self by saving in a 401k. But there's just some options there to consider. Maybe not come, you know, just like pumping as much as you can. And like my wife, for example we've talked about her on the show before. You know she, you know when the company offered that Roth 401k option for. She's like, hey, what should we do? She's like I'm putting this, you know X number of dollars in the traditional. Should we kind of pair that back? Right? So it's looking at just looking for those ideas and options that maybe make your particular strategy a little bit better for you, right, and every situation is different.

0:14:26 - Speaker 4
Exactly, and you know working with an advisor. That's one of the questions I ask is does your plan provide a Roth? And usually the answer is I don't know. And so just by bringing that to your attention and then researching it could, and then switching to a Roth 401k can save you a lot of money in the future by just paying the taxes now and then having tax free money in retirement. So definitely getting advice speaking with an advisor can ask we'll ask you questions that you may have never even thought of before.

0:14:58 - Speaker 3
Alright. So good content, good show this week with Sherry, as always. Thanks for hanging out with us. We certainly appreciate you here on Money Chic Women in Money, and so if you've got some questions, reach out to her. Give her a jingle at 833-833-1903. I didn't say that twice, by the way, because I messed up. It's what the number is 833-833-1903. Or you can just stop by the website GreenWayWealthAdvisorycom. That's GreenWayWealthAdvisorycom. Don't forget to subscribe to us on Apple, Google, Spotify, whatever podcasting platform you like. That way you can catch future episodes as well as check out past episodes. And, of course, Sherry again, is always here to help you at GreenWayWealthAdvisorycom. Sherry, thanks for hanging out. Have a great week. Thank you, you too, Thanks. We'll see you next time here on the podcast. This is Money Chic Women and Money with Sherry Rash.

Shari helped my husband and I consolidate our finances and create a system that works for us. She is a great listener and very authentic - we are thrilled to have this trusted advisor on our team.

Jessica, Charleston
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