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One of the BEST way to save on taxes: What is a 401k

what's up you guys it's great in here so

due to popular demand from the video I

made about a week ago about why you

should open up a Roth IRA I'm going to

make this video to share with you guys

what is the best ways to reduce your

taxable income and one of the best ways

to save a lot of money on your taxes

this is also one of these videos it's so

important to watch all the way through

seriously gives a chance I promise it's

going to be worth your time if not if

you get to the very end and you just

like has made up your mind and I just

wasted ten minutes of your time

seriously just click to this like button

and I deeply apologize but I highly

doubt there's going to be the case it's

a really important topic and at least

give it a chance we can't have anyone

freak out out there ok got a backup out

so with that said I'm going to be

sharing with you guys exactly what a 401

K is how it works and some of the pros

and cons of having it so to start I

actually had no idea what a traditional

401k was until I was like 20 years old

and until then I literally just got it

meant for hundred and one thousand

dollars who's an idiot but what it

actually refers to is section 401 K of

the IRS tax code which authorizes

companies sponsored retirement plans so

the 401 K was started in 1978 and the

entire intention of it was just to defer

employee earned income into retirement

jobs don't work well it's fairly simple

you can contribute up to $18,000 per

year it's the 401 K accounts for up to

24,000 dollars per year if you're over

the age of 50 and again it's pretty

simplistic the money you put in the 401

K accounts is not taxed right now but

instead is taxed after the age of 59 and

a half you begin withdrawing the money

from the account which hopefully you'll

be in a lower tax bracket then than you

are right now today so there's a totally

simplified example here let's say you

make a hundred thousand dollars each

year and of that you contribute eighteen

thousand dollars to a 401 K contributing

that eighteen thousand dollars assuming

you're in a 25% tax bracket is going to

save you about forty five hundred

dollars in taxes now by doing this you

have an extra forty five hundred dollars

up front right now that you can invest

it's going to work for you for the long

term and then by the time you get

retirement age after fifty nine in the

half you begin taking your money out the

money then at that point in the future

is going to be taxed as ordinary income

the biggest advantage here is that you

can invest all your money completely

pre-tax and have all of that working for

you so that extra forty five hundred

dollars can grow to something

substantial because you

have had that to begin with because you

would have just ended up paying that

upfront right now in taxes like as an

example because it taxes if you wanted

to invest that same $18,000 but in a

Roth account which again is all done

after taxes are taken into consideration

you would need to earn twenty four

thousand dollars to have eighteen

thousand dollars left over after taxes

just assuming you're in the twenty five

percent tax bracket now with a 401k

eighteen thousand dollars is just

eighteen thousand dollars because you

haven't paid any income tax on it yet so

that eighteen thousand dollars

disinvested in a 401k could be worth a

lot more money than just eighteen

thousand dollars it just has been taxed

yet then once you reach the age of fifty

nine and a half you can begin

withdrawing all this money from the

account now the catch is because you

haven't paid any taxes and all of this

money you pay tags for the money that

you withdraw as if it's ordinary income

but the advantage here is you've had a

lot of pre-tax money working for you so

in that eighteen thousand dollar example

for instance you've had an extra forty

five hundred dollars being invested this

compounding interest it's making even

more money that you can then draw from

in the future and again like I said

you're betting that the tax bracket when

you retire is going to be less than what

you're paying attached is right now and

you could just profit the difference so

how do you go about doing this and how

you go about setting it up well if

you're employed it's as simple as going

and asking your employer if they offer a

401k plan and if they do look into

setting one up and contributing to it

sometimes your employer's will also

offer what's called an employer match

which means that they'll match a certain

amount of money that you put in any

account any time they offer this

absolutely do it 100% of the time

because it's pretty much getting free

money the grow employer offers a 401k

match seriously just do it like for

instance if you put in a thousand

dollars your employer will also match

another thousand dollars it's free money

please go ahead do that if your employer

offers it if they don't it's not the end

of the world but anytime they do take

advantage of it now the downside here is

that if your employer doesn't offer you

a 401k option you might be out of luck

and instead it might be better for you

just to contribute to an IRA now if

you're self-employed like I am you have

the option to set up a set 401k account

where it's sometimes also called the

solo 401k account this allows you to

contribute as both the employer and the

employees up to fifty four thousand

dollars

for a year I highly recommend doing this

if you're self-employed it gives you a

lot of flexibility and I personally use

Vanguard with a total stock market index

fund for all of my investments in asset

401k but of course you're free to do

your own research and invest wherever

you feel the most comfortable now if

you're not employed or you're a student

or you just have some side cash coming

in here and there don't worry about it

it might just be best at this point to

open up a Roth IRA but keep the 401k in

mind for the future so now is the

question when is at the right time and

when should you contribute to a 401k and

generally speaking it's better for you

to invest in a 401k if you're making a

lot of money right now you're in a high

tax bracket right now and you intend to

retire with less income and a lower tax

bracket in that situation it makes sense

to take the upfront tax deduction now

have extra money working for you making

you even more money and then when you

retire in a lower tax bracket you profit

the difference like I said from what you

would be paying right now and what you

would be paying in the future which

you're making less money you're going to

hopefully be in a lower tax bracket in

this would give you a lot more money

upfront to invest as opposed to a Roth

IRA account for instance but now

generally speaking if you're young right

now and you're not earning as much money

as you plan to be making in the future

and you plan to be retiring with a lot

more money in the future than you have

right now maybe a 401k probably isn't

the best option for you and instead

you're better off looking into a Roth

IRA over unlike a Roth IRA where you can

withdraw all your contributions tax-free

prior to the age of fifteen and a half

with a 401 K you can't do this because

all of the money you've already put in

there is pre-tax it hasn't been taxed at

all so if you take any of it out you're

subject to a 10% penalty plus you have

to pay the taxes you would have paid off

so I just recommend instead if you put

money in a 401k chances are it's best

leave it there

don't touch it forget about it and then

deal with it when you're a lot cooler so

with all of that said let's now discuss

a few of the potential downsides of

investing in a 401k the first downside

is just a lack of liquidity you put your

money in there and it stays there until

you're fifty nine and a half that's a

very long-term investment at least with

the Roth IRA if you put five thousand

dollars in that account

you can always take that $5,000 back out

at any time without a penalty but with a

401k any money you put in there like I

just said it's subject to a 10% penalty

plus you pay taxes on top of that if you

take it out prematurely now for someone

like me I really value the liquidity of

having cash on hand because my primary

investments are usually real estate so I

like having the extra cash on hand and I

can use it anytime to invest in real

estate and buy something that cash flows

having a 401k for me and investing a

huge amount of money in the 401k right

now doesn't necessarily make sense I do

put some money in the account but

predominantly for me it's all invested

back into real estate

the second downside I see is that your

employer could be charging some really

high fees in your 401k account so for

instance if they're charging me like 2%

annually for the 401k plan that could

dramatically reduce your returns that

make it a lot less appealing so before

you invest in a 401k plan find out what

the fees are and if they're going to be

absurdly stupidly high at least know

that going in so you can adjust your

expectations and maybe it's not as

worthwhile as what you thought

the third downside of tea with a 401k

account is that you could potentially

retire in a higher tax bracket and I

know for me for example I don't want to

retire earning less money if everything

goes well and everything goes to plan

for me I definitely like to retire with

a lot more money than what I have right

now which means the taxes I'm paying now

are actually going to be less than the

taxes are going to be paying when I like

60 years old

so it just depends in your situation if

you're someone who wants to save up a

certain amount of money and then go off

and just retire whatever age then maybe

this is the right option for you but if

you're planning to retire with a lot

more money in the future then definitely

take that into consideration that

there's a chance you just end up paying

more taxes in the future than you would

have pages today the fourth downside I

see is that your money is subject to

some market risk and again I mean this

is pretty much unavoidable it's the same

thing with a Roth IRA but it's something

definitely worthwhile to mention that

because your money is invested there is

some risk involved in that and yes there

is a chance that your returns aren't

going to be as good as they have been

historically there's a chance that you

might lose some money short term so

anytime you invest money there is risk

so in a 401 K this is certainly no

exception and by the way I'm going to be

making a future video about all the

risks

of investing and putting the money in

the stock market or real estate so

definitely stay tuned for that now with

all of that said what's my

recommendation now my personal

philosophy is just do a little bit of

everything

invest in a 401k invest in a Roth IRA if

you want to do real estate invest in

real estate if you want to buy a

business buy a business do a little bit

of everything and it's a very least

that's going to give you a lot of

options in the future because the truth

is none of us really know what the tax

system is going to be like 20 or 30

years from now it may be in our favor it

may not

sometimes a Roth is going to be better

sometimes it's not sometimes a 401k is

going to be better sometimes it might

not so we don't know any of these things

there's so many variables so my personal

philosophy and recommendation is just to

do a little bit of everything and

diversify a bit don't put all of your

eggs in one basket that could work out

amazing for you and you could make like

a ton of money and that's great or

there's a chance you risk a lot of that

maybe it doesn't work out as well as you

would plan so for me personally I

probably just invest a little bit in

everything that's the route that I would

take so because everyone always wants to

know to what I do I have a Roth IRA

invested in an S&P 500 index fund with

Vanguard and then I have a 401 K

invested in that same fund and then

obviously the majority of my money is

thrown in real estate investments and

that's where like the majority of my

money goes it's like all real estate but

for me the Roth IRA to throw money in

that the 401 K throw some money in that

too and at least I have it scattered

around even though the majority of my

money is still in real estate at least I

have some other options to choose from

in the future so with that said I really

hope you enjoyed this video and like my

fingers are crossed you didn't hit the

dislike button I hope you found some

value in this this is really just meant

to be an introduction to a 401 K and

what it is and some of the pros and cons

of it so that you can begin to do some

more research and see if it's right for

you so if you're into it if you liked it

and you want to see more of these types

of videos make sure you subscribe

I'm going to releasing a lot more videos

in the future I'm also in the process of

buying some more real estate so I'm

going to be covering all of that like

the whole remodeling process and

everything so if you want to stay a part

of that stay tuned and keep up to date

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pretty much daily so if you want to be a

part of that too

you know how to find me on there thank

you again for watching I seriously like

I said I had so much fun making these

videos and like learning out with like

finance these sort of topics to talk

about money and all that sort of stuff

so like I really enjoy this I hope you

guys enjoyed do thank you again for all

of your support and until next time