Free Retirement Money: 401ks and IRAs (with Jason Lee)


In this episode, Anthony welcomes Jason Lee, a financial planner extraordinaire who helps people in retirement and other financial plannings. Jason joins Anthony today to explain what retirement plans are and their benefits to you — including the 401K, the IRA, and the Roth IRA. Listen as they talk about every bit of information you need to know about your retirement plan, how you can maximize them, and what strategies you can do in using your benefits.

Covered Topics

  • The 401K Plans
    • Contributions
    • Investments
    • What happens when you leave your job
    • What happens at retirement
  • The 3-Bucket Approach
  • The Traditional IRA
    • How it works
    • Benefits
  • The Roth IRA
    • How it works
    • Benefits
    • Eligibility and exclusions

Show Notes

  • 00:34 – Anthony introduces Jason to the show
  • 02:19 – The 401K Plans
    • Retirement plans offered by employers
    • The purpose: Company tax break and employee’s benefit
    • Employees contribute from their own paycheck
  • 03:33 – 401K contributions are pre-tax
  • 04:05 – Free money #1: saving on taxes thru 401K
  • 04:33 – Free money #2: Company match
    • Employer matches employee contribution upto a certain percentage
    • Jason shares an example
  • 06:23 – People on the 401K
    • Does not know all the rules
    • Not maximizing the benefits
  • 08:19 – The lack of awareness and education
  • 09:49 – Jason answers more info on signing up on a 401K
    • 401K account with your employer
    • How to log into your account
  • 12:42 – Your decisions for your account
    • Picking investment options
    • Mutual Fund
  • 14:19 – Anthony talks about mutual funds
    • Specialized funds
    • Different risk levels
    • The third party administrator
  • 16:58 – The pros and cons in going to HR reps vs Financial planners
    • Financial planners may charge for consultation
    • Third party admin can also help
  • 18:36 – What happens when you leave the company
    • Taking out the contribution
    • The downside of getting contributions before retirement age
    • 10% income tax penalty and 20% withholding taxes
    • Your funds become 100% taxable for the year
  • 20:18 – Leaving your contribution with the company temporarily
  • 21:25 – Transfer 401K to your new company (if applicable)
  • 22:04 – The direct rollover
  • 23:00 – Another option: from 401K to IRA
    • Individual Retirement Account
    • Through online sites or through financial planners
  • 24:56 – Taking a loan from your 401K
  • 27:07 – What happens in retirement
    • Retirement age 59.5 years old and beyond
    • You are able to use money without penalty
  • 29:08 – The 3-bucket approach to save money
    • 1099 Now Bucket
    • 1099 Later Bucket
      • 401K and IRAs
    • 1099 Never Bucket
  • 34:07 – The traditional IRA (Individual Retirement Account)
    • Contribution upto $5500 per year per person below the age of 50 and $6500 per year per person for 50 years old and above
    • IRA has additional options in investing
    • Tax deductible
  • 39:06 – Options in setting up an IRA
  • 40:45 – IRAs become taxable when you use them
    • Government requires a forced withdrawal for a certain percentage at 70 ½ years old
  • 43:23 – The Roth IRA
    • Tax free, tax deferred growth, and tax free withdrawals
    • Required minimum distribution is not applicable
  • 46:45 – Jason explains the rules in Roth IRA
    • Annual income of $120K for individual and $200K for a couple, not eligible for Roth IRA
    • Someone who earns less $120K/year qualifies for Roth IRA
  • 48:36 – The combinations in doing 401K, IRA and Roth IRA
    • Do 401K + Roth IRA
    • If not offered 401K, do either IRA or Roth IRA

Link and Resources


Call or text 212-401-2990 if you’d like to work with Anthony (or any of our guests).

– What’s the best way to start saving for retirement? How about starting with the free money, that’s right did you realize that the government wants us to save for ourselves so badly that they’re willing to give us all sorts of free money incentives to save for our own retirements. We’re talking about 401ks and a multitude of different IRAs. Even if you think you know all about them just continue listening. Let’s make sure that you’re harvesting all the full maximum benefits that the government’s willing to give to you, that you’re doing the right combination of plans or the right contribution amounts. I’m talking again with my good friend, childhood friend, Jason Lee. Hey Jason, what’s up?

– Hello.

– Jason’s a financial planner extraordinaire and he helps all of our friends with their retirement and other financial planning. Is that accurate Jason?

– Yeah.

– Just a little bit about Jason, we grew up, our Dad’s went to high school together so we did all sorts of family trips together. What’s your favorite memory of one of our, one of those family trips we took J.

– I think it’s when we went to my parents summer house and you went into a fight with some other kid.

– Thank you for sharing that. I thought you were going to go more vanilla. Like, oh, watching Space Balls multiple times but you went with the fight, thank you.

– But did do that, I remember Waiting in an ER waiting room for one of the other moms got injured in a ski accident or something. I don’t know if you remember that.

– Oh, I do remember that, vaguely. Well that’s not very funny though, why were you laughing?

– It’s one of those things that stick out in my head when I first think of all the trips. Otherwise, it would be the times when I went to your house growing up in the city while our parents were taking ballroom dancing lessons, that was more memorable.

– That was, does it look like your parents took all those ballroom dancing lessons? Do you see them dance?

– No, never, I don’t know what… That was probably just an excuse for our dads to get together and just get drunk, so, you know.

– Probably, I don’t want to bore our listeners too much, let’s jump right into this. Here’s how I like to do it. Let’s do a rundown of the four, I guess, most common types of retirement plans and we’ll just do a quick fire-down of all those and then we’ll jump into comparisons and which ones might be best for different people. How does that sound?

– Okay, perfect.

– So, let’s start with the 401k, right. I think it’s fair to describe this one as the one for folks that are employed at companies but maybe you can really dive into that for us. So, who generally offers 401k plans to their employees?

– So, 401k plans are basically retirement plans that are offered by employers, usually larger, mid to large level employers. Sometimes small businesses might do as well but the purpose of it is, number one, to give the employees a retirement benefit but also for the company to receive some type of a tax break every year. And in doing so, by offering that type of plan, maybe it creates an employee loyalty, too, so they won’t look to other jobs. The benefit is, number one, it’s the employees, I’m sorry, are the ones contributing out of their own paycheck. So, it’s almost like a forced way to put aside funds for the future and the beauty of it is they’re able to do it on a pre-tax basis. So, it’s almost like a tax deduction for the employer but it’s also a way for the employee to deduct on their taxes and by doing that they’re putting a certain percentage of their paycheck into this account and hopefully, by the time they retire it will grow so that they can live off of that.

– Okay, so you said something important. That 401k contributions for me, you know, Joe Worker are pre-tax. So what does that mean bottom line. Does that mean I pay less in income taxes that year?

– Yes, so, generally speaking, yes. You earn your paycheck, you get your salary and then from that salary, from your gross paycheck or your gross income you are deducting whatever your contributing from your overall top line number so that when they calculate your taxes at the end of the year, guess what you’re paying a little bit less that year.

– That’s free money item number one, when you contribute to a 401k with pre-tax dollars you’re basically saving on taxes right there. Yeah, is that correct?

– Yes, consider whatever you’re saving on taxes as extra money in your pocket, so to speak, that you’re actually not gonna be using but still it’s going somewhere where you’re going to use it down the line.

– There’s a big free money option number two as well, right? With most 401ks, the employers will often offer something really nice. Can you tell us a little bit about that?

– Yes, so this has sort of changed over the last 20 years or so but some employers, I should say most employers, will do some type of company match in addition to offering this type of plan for the employees to contribute to. The employer might also throw in a little from their own pocket to, again, to maybe make it more attractive for the employee. They probably won’t match the full amount but up to a certain percentage for the most part. Employers do still match and what they’ll do is when they match, of course, all those funds are meant to go towards your retirement as the employee but they’re typically might be a vesting schedule. Meaning, in order to be vested, in order to have access to that full amount of money you have to be employed for a certain number of years, typically five years is the number.

– So those details are important but the bottom line is, let’s use nice round number example. If somebody works at a company and is earning $100,000 and let’s say the employee is putting in $5,000 a year for their 401k. If the company is matching 1 for 1, you know, like a full match, they’re matching your $5,000 and giving you $5,000, is that right?

– Yes.

– So that’s $5,000 per year that your employers giving, it’s like a bonus.

– It is a bonus, yeah.

– And all you have to do is actually save for your own retirement. There’s no extra work involved or anything like that, yeah?

– Yeah, I mean other than just showing up to work every morning and making sure you sign up for the 401k option that they give you, that’s all you need to do. And of course, make sure you’re well allocated but that’s, I guess we’ll go into that a little later.

– When you help people out, when people are first starting with you, how often do you see people not or failing to take full advantage of this?

– I’m going to say, probably, I don’t see it as much thankfully. For the people, whether my clients who are employed by large corporations, you know, be it a law firm, a bank, you name it, a lot of them do enroll in the 401k plan, which is good but at the same time I don’t think they’re fully aware of all the bells and whistles and the details and the benefits that they are getting because they don’t know the rules, some of them, the tax rules and so forth. So it’s definitely, I see a lot of people are enrolled but maybe aren’t using the optimal set up. Meaning, maybe they’re not contributing enough, maybe they’re contributing too much, maybe they should be contributing up to a certain amount based on what the employer you know, might do for them. And also how they’re invested, maybe they’re not aggressive enough, maybe they’re to conservative, maybe for a younger person they can take a little bit more risk because, you know, again, this is still a retirement plan that’s used for the purposes of the future when one retires. Those little minor things but for the most part I think a lot of people are enrolled. But I do run into some who are not and their main reason is they don’t know, again, all the additional benefits. It’s not just, oh, what, a couple dollars there is a couple of less dollars in my pocket. No, don’t worry, I just rather take it with me now but guess what, by not doing that you’re also leaving other money on the table like we talked about, maybe the employer match money. And maybe just in general they’re missing out on investment opportunity when you see the way the markets have been going. Guess what, that’s also leaving more money on the table.

– It’s got to be extremely frustrating because I see that as well. Friends, family, friends of friends who either don’t do anything at all even though they have a full match option from their employer or they only do a part because that’s all I’m comfortable with, oh, I didn’t know, so, super frustrating.

– It is frustrating but I would say the main reason is definitely lack of awareness or I should say lack of education. They’re not aware of the full benefits of how these work. And when you’re working for a large company you might have someone from the 401k administrating company come in and maybe be available for the employees to come by during their lunch break and they’ll go over all the details with them. But when you’re working with a company and there’s hundreds of employees and maybe there’s maybe one or two people from the 401k company who are there to answer questions, most of them are busy caught up in their own workday so they don’t want to go and be bothered or maybe having to wait online or whatever the reason perhaps. So they just say, alright, my colleague who sits next to me did it like this, I’m going to do it like this and that’s what ends up happening.

– Interesting stuff, alright, well okay. So, I’m going to roll it back to the basics a little bit more as well because not everybody knows, maybe we have some younger listeners who, you know, don’t have brokerage accounts or don’t know much. Let’s say you do it right and you sign up for your company’s 401k. What does that mean? Where is the money? How do you log-in? These are some sort of basic questions that some times folks don’t understand. So I know how to login to my personal banking account with Chase and I know how to login, you know, where I need to go to login to my personal brokerage account with, let’s say, Vanguard, right. But if I signup with a 401k with my company, how does that work? I mean is it through my company website? I know it’s different but give me some typical situations, please. Just so folks can kind of envision how this works.

– So, it’s going into an account but you’re account is most likely going to be part of a larger, sort of a general account under your employer. So, let’s just say its XYZ Corporation, when you login to whoever. So the most common that I see with companies that handle 401k plans is maybe a company like Fidelity or maybe Wells Fargo. And let’s say in the case of Fidelity they have a website, they probably handle 401k plans for hundreds of thousands if not millions of companies around the country. And so, they’re going to have all the details of how to access your account. But, basically it’s going to be typically on a Fidelity 401k section of their website and you go in and a lot of times you don’t have an account number, it’s actually your social security number and it might require you to create a pin number. Sometimes they do give you individual account numbers but a lot of times it’s just Fidelity and then maybe there’s a, sort of, I guess you can call it an account number for your entire company and then within that account, you can log onto your own section of that larger 401k plan. It’s still your account, only you can access your portion of it online but that’s typically how it works and then you would need your social and your pin number. It’s usually on the 401k administrating company’s website. Not on the employer website but I guess, in some cases, they might have it available on the employer website. But typically it’s coming from the actual financial institution.

– So, if I’m hearing you correctly, and again, I’m just trying to paint a picture for someone who’s never done anything like this before, so they have some level of comfort. Assuming my company uses one of the larger institutions like Fidelity or Schwab or one of those large banks and brokerages, then I can use their website, or perhaps even their app. These are gonna be secure and sort of up to date, cutting edge apps or websites but the only twist is, instead of logging with my personal credentials, I’ll be going in through the, let’s say, the Fidelity, my employer’s section and I just sort of sub-identify that it’s my account under that employer, something like that. But, all the tools and features and help center, it’ll all be there from these really big banks.

– Yeah, they’re gonna probably have all of the available tools just like you would if it’s a personal brokerage account with Fidelity. And a lot of times, if you already have personal with a certain company, like with Fidelity, then usually links it so that you’ll still be able to access your Fidelity account as well.

– So, we have the account set up and we made the right decision to participate, we put the money in and hopefully our employer kicks in some free money as well. Alright, it’s in this account, what’s happening in this account? Is it like a savings account where I’m getting interest, is it like a CD, what exactly is going on in that account, please?

– That’s now where you have to make some decisions, basically, you have to pick from a list of available investment options, almost always it’s going to be a wide range of mutual funds, could be from that particular company only or a lot of times, they might offer mutual funds from other companies. So, a mutual fund, for those that don’t know, is basically like investing in a stock or a bond but in a mutual fund, it’s actually pooled, I should say, the risk is pooled because now you’re in an investment that holds many mutual funds and many bonds or a combination of both. So, it’s actually a much more risk adverse, although, don’t get me wrong, there is still risk there. But you have exposure to the stock market without having to take the risk of maybe owning one particular stock. And a lot of times, the reason they do this is because these mutual fund are managed professionally by professional money managers, or professional portfolio managers. So, all you need to do is just pick the funds that you think are best for you and as you contribute to this 401k plan, each time you, each contribution is going to be going into these mutual funds, however you picked them, percentages and everything. And then, as you invest, it’s just gonna keep going with however the funds are performing which has to do with how the stock market is going. Which could, you can say, it has to do with how the overall economy is going. But, as those things keep going, your account will continue to grow and go accordingly.

– I’m gonna role that back just one second to make sure some of our newer listeners understand. A mutual fund is sort of like a basket of stocks so you’re not stuck in one stock. And just a rough example, really rough example is instead of buying shares of Apple, right, Apple computers, you would, for example, have shares in this basket called a mutual fund of Apple, Amazon, Facebook, Google, et cetera. Those are all very tech heavy, these baskets are usually more across, they would be like Apple, Walmart, maybe a bank, maybe a clothing, you know, food, who knows. But just, I’m trying to give the idea that it’s not just one. You’re getting a little bit of everything.

– The mutual funds are so specialized now where you can actually have a fund that focuses directly on, say, tech companies like Apple or Amazon and so forth, or Intel. Or you could have a mutual fund that deals with just large companies like Coca-Cola, Apple, Google, Microsoft. Or you could have a company that deals with just strictly small companies, small start up companies. Again, maybe XYX Corp, that just IPOed a couple of months ago. And depending on the type of fund, there’s different risk levels but yeah, you could each fund still is going to be a pool of stocks and then if you have a special group of stocks that you’re looking for, that’s an option. But what, the other thing is, each fund also, within the range of options that the employer give you or that the 401k administrator gives you, they’re gonna have pretty much, across the board, all those sections of the stock market and the bond market available to you. So, again, and you have the option to also spread it out yourself, so when you make each contribution, just think of 100%, you could allocate 10%, 5%, 15% however you want to whichever type of fund you want. Then, for, you know, again, maybe the average person, sometimes it’s a little too difficult to comprehend the different types of funds so then it always helps to talk to either an advisor, like myself, or you can even talk to the person who, again, representing the 401k administrating company. We actually call them the third party administrator but they are basically the one representing the company that’s handling your 401k, usually they might have someone there to direct you as well.

– Even with the sort of narrow menu of options that your company’s 401k offers, even though it’s kind of, you have a much narrower field of choices, it still sound pretty complicated for someone who’s not, doesn’t do this for a living. So, yes, they could go to their company representative or they could hire somebody like you. Can you quickly go over the pros and cons of why they would, in what circumstance they would just go to their HR representative or compensation representative? And in what scenarios it would be, make sense for them to seek you out and talk to you?

– Typically if you’re gonna go to a financial advisor, like myself with no prior relationship to get advice, unless it’s a friend of yours, they might actually charge you for that type of advice. So, if it’s the case like that, depending on how much you think it’s worth while. If you think that their person’s knowledge and expertise is still worth whatever the fee they might be charging. Could be, you know a percentage or what have you, then it would be good to go to them because, a lot of times, the… Well, okay, having said that, it’s also okay to go with the person representing the third party administrator because their gonna have at least some fair base of knowledge of their own mutual funds that they’re offering, they have to. And those, any kind of advice you’re getting from them is, you shouldn’t be getting charged for, but most likely you’re not gonna be getting charged for. I guess, it really just depends on how much direction and how much guidance you need. I will say this though, if you do have someone who, like an advisor who you’ve been working with personally prior to enrolling in this type of 401k plan, then, I would say, it wouldn’t hurt to at least ask them to do this because then if you’re already one of their customers and you have relationship with them, they probably won’t charge you for that type of service.

– We’re still on 401ks, this is a company benefit, not every company does it but those that do, many will even give you a free money match and we had talked about how you login at a financial website, through the company’s, sort of, sub website. So here’s a question that probably people are thinking, hey, okay, everything’s company, company, company, what happens if I quit? Or what happens if I change jobs? What happens to my money? I mean, can you go over that a little bit?

– Basically, once you leave your company, or we all it separation of service, you basically have four options. The first one is to just close it out, basically take a distribution and say, okay, even though I’m not at retirement age, I just, whatever I put in, I want to take out and it’s mine now. The good thing is, yeah, it is yours, now all that money you worked hard to put away, you get to use it. But the bad thing is, ’cause you’re under the age of 59 and a half, which is the retirement age for these IRAs and 401ks, you’re gonna get hit, number one with a 10% penalty come tax time but also, most 401k plans do an automatic additional 20% withholding at the time that they disperse the funds to you. So, because you have not paid taxes on, not even a single dime that’s sitting in your 401k account, once you, if you were ever to leave your job and basically close your 401k account and take out all of the funds, that now becomes 100% taxable that year. So, the companies by law are required to withhold 20%, right off the bat, so you’re gonna get 20% less of what you had in there. And then, by doing that, come tax time, in addition to the 10% penalty, you also pay taxes on what you owe based on your income for that entire amount from the 401k plan, minus the 20% ’cause you’ve already lost that up front.

– So, option one, when you quit or change jobs, or, you know, you’re in mid career, leave a company, option one is just take the money and put it in your pocket and pay a lot of tax, basically. Can we go onto option two ’cause I don’t think a lot of people are gonna like that option.

– Option two would be, you can actually leave it in there for as long as, be the company will let you, a lot of times they’ll probably let you leave it for a year, maybe a few years at most, but at some point, they… When I say leave it in there, just let it to continue to grow or go up and down with however the investments are performing even though you’re not putting any more money in there because now you’re not working at this company, therefore you’re not receiving a paycheck from this company, therefore you cannot make your contribution. However, the existing money that’s in there, you can let it continue to sit for as long as they let you. And a lot of times, they will eventually tell you to take your money out because they’re still doing the record keeping, sending you the statements and giving you, you know, all the services and the tools whether it be online or, you know, through the mail and so, even though it’s, you would think, it’s just one account, it still costs them whatever it cost them to maintain your account. So at some point they’re gonna want you to leave. But you could leave it in there for as long as they allow you to, so that’s another option.

– So, option two, just let it ride until they kick you out.

– Option three is, if this applies, if you were now to start employment with a new company that offers their own 401k plan, you can actually transfer this 401k to your new 401k. So, with the new 401k, you’re gonna hopefully start contributing just as you were doing with this previous company but whatever money you’ve accumulated in that previous 401k, you can move over to your new 401k and now you’ll start from whatever that amount is and then continue to contribute that way.

– This is an important term, is this considered a rollover?

– It is a direct rollover, yes.

– Okay, and, for anyone who’s not familiar and who doesn’t understand that terminology, the rollover, and Jason, correct me if I’m wrong, make sure I’m getting this right, is when you do a very special type of transfer from one 401k to another 401k, directly, without your hands, you know, without the money. So this is not you withdrawing it, putting it into your personal checking account and then subsequently putting it into the new 401k, it goes directly from old company to new company, you’ve never touched it. And this is important so that you don’t get hit with that tax from option one, is that right?

– Almost always, they can do a direct transfer, which we call a rollover from one institution to another. So basically, you wouldn’t see a dime of it, it’s going directly from, either by the form of a check or a EFT or electronic funds transfer from the company that handled your old 401k directly to the company that’s handling your new or current 401k, and that’s common.

– Let’s talk about what happens when you reach retirement age, I think you mentioned it was 59 and half.

– When you leave the company an option you have, number one because you might not start at new company right away or you might not start at a company that offers a 401k plan. I’ve seen cases where somebody leaves a large company to join a quote en quote start up company with a few of their colleagues and because they’re such in the beginning stages, they don’t have the wherewithal to start a 401k plan right away. So, in a case like that or just in general, you always have the option to rollover that old 401k, the same way we said we were gonna roll it into your new 401k but in this case, you could roll it into, what we call an IRA, individual retirement account and just directly roll it over so that now, it’s in a similar type of retirement plan, similarly invested, it’s in an account that’s strictly under your name without any connection to employers or without any connection to a third party administrator, it’s basically under your control. And the same way it’s usually done directly, meaning instead of you taking the money out for yourself, they would do a direct transfer of funds from your old 401k plan to this new IRA with whoever you may have it with. So an IRA would be done, you know, you can do it on your own through one of those sites, Fidelity or any of them or you can do it through an advisor like myself where we would set up an IRA for you and then now, this new account, or we would set up an IRA account for you and now, whatever funds in your old 401k would go into this IRA. And then, we would similarly, basically put together some investments and kind of an investment strategy and a portfolio for you to be well invested and hopefully reap the rewards later on at retirement.

– And we’re gonna dive into the details of IRAs and there’s a couple different types as soon as we wrap up the 401ks and we’ll do it in sort of a compare and contrast format so that we don’t go over all these points all over again.

– One thing, actually that it’s important that I think we didn’t, I forgot to touch on is in a 401k plan, this is going back to the very beginning of our conversation, when we just started talking about 401k plans, as you are contributing, you know, again, on a pretax basis most of the time and your company’s contributing and so on, so forth, one of the options you have as an employee, assuming you’re still currently working for this company is you can actually take a loan out of your 401k if you ever need it. And the reason for that is because it is your money and that’s your retirement money but they do allow a, almost all plans allow the option for your to borrow, basically withdraw a certain percentage of what you have in there but with the assumption that you’re going to be paying it back from each paycheck. So it’s gonna be usually paid back in the form of payroll deduction. So just like you’re contributing from each paycheck, this, for example, if you decided to take $25,000, and then you go on a repayment plan to pay, I don’t know, $200 a month, that $200 would also be deducted in addition from each paycheck to payback that $25,000. The beauty of it is, you’re paying yourself back, so, if you needed to borrow money from it, yeah, you could pay it back but you’re just paying back yourself. So, that’s another feature that it has. It would be, to run into someone who will tell you that they’ve ever done some type of a loan from their 401k plan, it’s very common, I’ve done it myself and, you know, there’s not tax consequence if you’re withdrawing from a 401k, in most cases. The only time that there is is if you borrow from a 401k plan and you haven’t paid it all back yet but at some point you do leave the company and then there’s still some of that loan is remaining, then that’s going to be considered a distribution, so you would get taxed on that. But, assuming that doesn’t happen, you’re still employed, and this actually a non taxable event, so.

– Nice to know, it’s kind of like having the ability to do HELOC on your house, just some way to access your money, basically. Lastly, let’s talk end game. Retirement age and what happens, you know, what has happened to your money all this time and when can you or when do you have to start pulling it out?

– So retirement age could be different for all of us, we don’t know when that’s gonna be. Of course, the earlier you could retire the better but realistically, retirement age, for most people has gotten later and later. So, at this point the way the IRS looks at, kind of, the early retirement age is still seen as 59 and half years old. So, in a 401k plan, you, working for many, many years and you’re contributing and working hard and living your life and at some point when you get to 59 and half or beyond, when you retire, you want to be able to now reap the rewards from what you’ve put away. But really, the point of it is just so that you could live off of this money for the rest of your life and pay the bills and go on vacations and do all those fun things that you had planned for retirement. The way it works is, once you hit 59 and a half, you are able to now use this money without penalty. You still have to pay the taxes on this money but it really just depends on when you retire, officially. So, at 59 and a half that’s the earliest you could access this money without penalty but just depending on when you retirement age is, so it could be 60, 65, 70, whenever that is, you are gonna most likely keep contributing to this until you officially retire and at that point, you can now start to draw from this plan and now live off of it and pay your bills and so on an so forth. But, the point of it is, hopefully, by the time you retire, compared to the time that you were working, you will be a in a much lower tax bracket so that your taxes owed will come out to a lot less than if you were, you know, paying taxes on that money 20 years before or when you were at your peak earning years.

– Something that we haven’t talked that much about but this is a huge benefit, I mean, this money has been growing and compounding tax free, all these years, right. Can you talk a little bit about why that’s such a huge benefit?

– We use three, kind of a three bucket approach to the different ways to save money. Maybe is should of brought this up at the beginning of our conversation but we have a three bucket approach that we call the 1099 now bucket. 1099 meaning, it’s a tax form, it’s basically a piece of paper that you get from any financial institution that you have retirement accounts with and if you have any type of transaction that’s considered taxable, they’re gonna send you something called a 1099 form at the beginning of the following year, which you now have to give to your CPA or you need to make sure that you disclose when you file for your taxes. So that 1099, a lot of times, is a piece of paper that most people don’t want to see but, unfortunately, we really have no choice because it’s not really the financial institution who’s, they’re the one sending it to you but it’s not for their benefit, it’s for the IRS. There’s really nothing you can do about that. So, when we talk about 1099, we have a 1099 now bucket, a 1099 later bucket and a 1099 never bucket. So, the point of the 1099 is, again, to show if you owe any taxes, if you had any taxable gain or income on any type of savings vehicle that you own. The 1099 now bucket is the one where people, you know, you’ve invest in the stock market, you double your money and then you sold everything and then now you, wow, I became rich. But guess what, you still have to pay taxes on that money that you earned, so that’s considered a 1099 now. That would be going into the 1099 now bucket. 401k plans and the IRAs, one of the benefits of them is they’re actually in what’s called the 1099 later bucket. So, even if your 401k plan doubles, just like that stock I was talking about, you don’t pay taxes on that, the doubling of your 401k, even if it triples or if it grows by 5 times over the course of 30 years. You’re not paying for any of those types of earnings. Number one because obviously you’re not withdrawing and your not selling any of those funds but even if you do make changes or exchanges or trades within your 401k from one fund to another, you don’t pay taxes on any of those types of gains because you’re in a, we call it a tax qualified plan, so as you were saying, it means it’s tax deferred. You don’t pay taxes on any earnings that you see on your 401k plan until the time that you officially retire and start to draw that money and start to use that money.

– That’s an interesting way of thinking about the power of compounding, of tax-free compounding. Let’s do an example, like using the doubling thing that you mentioned. So, if somebody, you know, buys and sells a stock, let’s say he starts at $10,000 and it doubles to $20,000, awesome, right. But then he’s gonna owe tax on his gains, probably right about, let’s call it $2,000, do we agree on that?

– Sure.

– Now he doesn’t have $20,000 in his account he has $18,000, so if he doubles that again, he’s at 36, is that right, yeah, $36,000 but again, he needs to take off another 20% on the 18 gains, so now he’s down to $32 and change. Now that same, and this keeps happening over and over again during the lifetime of the person who’s working. Same person who has $10,000 in a tax free compounding account, a tax qualified account like a 401k, like an IRA, like the things we’re talking about today. It goes from $10,000 to $20,000 and stays at $20,000 until later and then it goes from $20,000 to $40,000. So we’re already, in just two flips, we’re looking at the difference between $40,000 and 30, what did I say, $32,000, $8,000 difference, that’s a, you know, a fifth of what we’re talking about. Huge difference. So I just want to make sure that, you know, put those numbers in everyone’s face or in their ear as the case might be.

– I’m not saying that you can’t be in the 1099 now bucket, it’s still good to have, you know, sort of be spread out everywhere but yeah, in that respect, it definitely makes a difference.

– So let me quickly summarize our 401k talk and then we’ll jump into the traditional IRA, which hopefully we move a little quicker because we can just do it by comparison to the 401k. So, 401k, if you’re lucky enough to work at a company that offers this, right, you need to be typically, you need to be a full time employed with the company, that is big enough to offer this.

– Six months, minimum of service before you can enroll, a lot of time, they have those rules.

– That makes sense because these are such great benefits but if you do get these great benefits, you’re getting, you know, a tax deduction when you put money in, so that’s money in your pocket. You’re getting the company potentially matching whatever you put in, that is literally just free cash into your retirement account. And, whatever combined is going in over all these years from now until retirement, it’s growing tax free or tax deferred and just on the compounding, that’s a huge benefit, we just did that example now of the difference between $30,000 and $40,000. So, those are the main benefits and yeah, that’s kind of 401k in a nutshell. But what if you’re at a company that doesn’t offer 401ks, can you talk a little bit about that, I’ll turn it over to the traditional IRA.

– For the person who does not work for a company that offers 401k plans, you can still get those similar, most of those benefits in the form of a traditional IRA. The traditional IRA is also, works the same way, it’s a retirement account that you would contribute to, this time it’s not coming out of your paycheck it’s just coming out of your own personal dollars. But, what it does for you is it allows you to contribute up to $5,500 a year if you’re under 50 and if you’re between 50 and, over the age of 50, you can contribute up to $6,500 a year. And that’s for one person. So you can actually do it as a couple, if you want to do it with your spouse and then you could double those limits which would be $11,000 for a couple under the age of 50 and $13,000 for a couple over the age of 50.

– Jason, hang on one second Jason, we didn’t talk about contributions limits for 401ks, so just for comparison sake, can you talk about that?

– So, for a 401k plan, it’s always looked at kind of as a percentage of your paycheck, so typically if you look at someone whose gross income, so say someone earns $100,000, you’re able to contribute up to 15% of your gross income, so whatever that comes out to each paycheck. 15% on a gross level you can contribute to a 401k plan. However, there is a limit, which is $18,500, I believe in 2018. So, if you’re salary is $100,000, you can contribute 15%, which would be $15,000 is your max. If you make $200,000, you would think you could contribute 15% but 15% would be $30,000, therefore you cannot contribute 15%, you can only contribute the max, which is $18,500.

– So it’s gonna be the maximum for 401k is $18,500 but if you’re right in the $100,000 range it’ll be something more like $15,000 per year.

– $15,000 or $18,500 which ever is the lesser of the two, yeah.

– And this compare, just to wrap, you know, tie it back to the IRAs. IRAs is $5,500 per year, per person.

– Yes, for anyone under 50 and if you’re over 50, they have a catch up prevision, they have allowed you to put an extra $1,000 per person. As you’re making these contributions in a traditional IRA, whatever amount you’re contributing, you’re able to, again, deduct from your overall taxes for that particular year. So, you always see people make contributions right around March or late March, early April. But basically it’s getting the same benefits as a 401k plan, so even though on a 401k your contributing from each paycheck, and in a traditional IRA, you are still contributing from your own personal dollars, but you’re getting that huge tax deduction, which is very important. And so, when you file for your taxes, guess what, you’re not gonna owe taxes on the full amount of what you earned that year, you’ll pay taxes, hopefully, on that full amount that you earned minus $5,500 or $6,500 depending on how old you are. And that’s an IRA. It’s going to be invested in probably, very similarly mutual fund and so forth but an IRA also gives you the option to have additional choices. So, let’s say someone wanted to invest in an individual stock, maybe someone wanted to invest it in some type of a real estate investment trust type mutual fund, maybe someone wants to, I don’t know, just go into something like, almost like a savings account or a CD, you have many more options available to you as far as investment choices because, again, it’s an individual retirement accounts. Now you’re not, kind of, in a larger pool with other colleagues or other employees, now you’re in an account that strictly your own account and basically you live and die all alone with the performance of that account.

– You’ve already answered a bunch of my questions, so let me just recap those to make sure they’re covered. So, you talked about IRA contributions are tax deductible when you file the following April, you get this huge tax write off, very similar to how the 401k dollars are pretax. You talked about what you can invest in and IRAs because they’re your own account, you have much more flexibility, you’re not limited to the menu of investment choices that your employer has chosen for you. You can do anything and it’s not just limited to stocks and bonds, you can do, you can even do, I think people do golds, commodities, some people do, I mean, unless this is way too complicated but some people do real estate through their IRAs. But, you know, we’re not gonna get into that. And we talked about the limits, we just covered that it’s $5,550 per person, per year versus the 401k that’s capped at $18,500 but it might be lower depending on what 15% of your income is. One more point of comparison, we talked about how with 401ks, you know, how you actually access your investments, we talked about going through Fidelity and then into your employers sub section of Fidelity and then getting into your sub account. What is it like with an IRA? Is it, do you just go to a Fidelity or to a, you know, JPMorgan Chase, how does that work?

– You have so many options, you can go to one of those Fidelitys or you can go to a bank or you can go to a financial advisor like myself. So, in a case like with Fidelity, you’re basically, you are kind of on your own again, they might have people to sort of help direct in certain ways but because it’s not like, again, a fee for service type deal, a lot of times you’re just going to get their basic advice and then you could just make your decisions based on that. Or you can go to an actual advisor, like myself, or at someone at the local bank, or whoever and in doing so, we still will give you almost all of those options but with a little bit more of our expertise involved. And then, now you’re still in a account that you’re, that’s still under your control and your management but you also have someone to sort of safe keep it and take, I guess, manage it, so to speak on your behalf and just make sure that it’s performing and doing the things that you want it to do and if maybe there’s any changes that need to be made along the way, that’s, you know, between you and the advisor. But that’s what we, that’s, I guess, what we do, too. And again, some advisors might do maybe a fee for service type deal or what have you, there probably might be some management fees and things like that, small fees but it’s, I guess, you’re getting what you pay for, so.

– Let’s compare what happens at retirement, I mean, correct me if I’m wrong, you know, without getting into those minutia detail, but generally, the rules are very similar for 401ks and IRAs. Meaning, the retirement age is 59 and a half, that’s when you start making distributions and the money has grown, exponentially, tax free during that time, or tax deferred during that time.

– So, same deal, 59 and a half is the earliest you can access these funds without penalty but, no matter what, these funds are now going to be taxable when you start to use them. So, I mean, most people wouldn’t just take it all out at once ’cause technically, again, you want this money to sort of last for a long time, retirement. So, as you just continue to draw a certain, anywhere from three to 4% every year, or on a monthly basis as your income now that you’re not earning it since you’re not working anymore, you’ll be paying taxes on whatever you withdraw every year. One thing I think we also forgot to mention for 401k and the IRA like this is, if 59 and a half is the earliest you can take it but again, we don’t know when that retirement age might be, it might be later, 65 or 68. As long as you’re working, you can continue to leave funds in an IRA or 401k plan. But if you are retired and say, you do not need to still access these funds right away, at the age of 70 and a half, the government will require you to take, what’s called a required minimum distribution and, you know, it’s a small percentage of what, at 70 and a half, you’re gonna half to start to take a forced withdrawal. Again, it’s not much but they still require you to take it because they want you to start paying some taxes on that money, so, that’s a little side thing that we forgot to mention.

– Okay, cool, so if we can just quickly recap. An IRA, if you’re not lucky enough to work for a company that offers 401k and matching and all that good stuff, you can still do an IRA, which is, also has excellent benefits. Once you put your contribution in, you get a big tax deduction the following year, that’s a nice big, free, tax refund for you right there. And also, the money that you invest in your IRA is growing and compounding tax deferred so that when you do take it out, you know at 59 or 70, whatever, somewhere in between there, it’ll have grown at much, much more accelerated rate than if it was in your regular individual account.

– Exactly, the only thing that you’re not getting from a 401k plan is, unfortunately, you’re not getting that employer match, if there is one.

– Getting an extra $2, $3,000 a year for the course of your career, that’s a lot of money.

– It still is tax savings to be made there, so yes.

– Let’s talk about the last thing, the Roth IRA. I mean, this is where people’s heads really start spinning like, okay, I can wrap my head around the 401k and now I know that the non company option is the IRA, but what, there’s another option? So, talk about why this thing exists and how it’s different, please.

– So, I’m gonna go back to my three buckets, the 1099 now, the 1099 later, and the 1099 never. So, a Roth IRA is now, it’s an alternative or almost like the opposite of what a 401k and a traditional IRA can do for you. And it’s basically a similar type, an individual retirement account with the same limits as a traditional IRA. So, up to $5,500 for an individual, up to $6,500 for someone over 50. But, now, the contributions you make are going to be invested the same way, they’re gonna grow tax deferred but come retirement, when you decided to use this money, now, you’re not paying any taxes at all on any of that money that you’re taking out.

– So, then in this case, isn’t it fair to say that money in Roth IRAs grows tax free?

– Tax free, tax deferred growth and tax free withdrawals, but the flip side is, in the traditional and the 401k, you’re saving on your taxes now whereas on the Roth, you are not saving on taxes now. So that’s why we call it 1099 later in the case of a traditional and a 401k because, and the reason is 1099 later because you’re paying, you’re saving on the taxes now and you’re gonna have to pay those taxes later. But in a Roth IRA, you’re actually already paid those taxes now, meaning the same way it’s coming out of your own personal dollars but your own personal dollars are going to be considered after tax money, meaning it’s money that you earned from your job, in each paycheck but after they took all the taxes out, or all the deductions out. So, it’s coming from your net income and, you know, as you’re contributing from your checking account or what have you, money’s going in, it’s being invested, hopefully it grows and by the time you get to retirement age you could use it completely tax free. And, the other thing is the required minimum distribution rules do not apply in this case because government has no incentive for you to take this money early or later, so you can actually leave it in a Roth IRA as long as you want, you don’t have to ever take it out, that’s completely up to you, it’s just considered a fully, tax free, non taxable, retirement account that you have at your disposal.

– So let’s talk about who that makes sense for. If you’re earning $100,000 a year at a company, let’s push 401k to the side for a moment, if you’re earning $100,000 a year, here are your options. You can do a regular or traditional IRA and make your $5,500 contribution and then you get that nice, $5,500 tax deduction which will result in a nice little refund that could really help you now, to pay a, I don’t, for a kid’s class or a car repair, who knows, something you need right now, right. Alternatively, you put that same, is it the same amount, the contribution limit is also $5,500 per year?

– Yes.

– In a Roth IRA, you can put that same $5,500 a year into the Roth but you don’t get that deduction, so you don’t get that, you know, few thousand dollars worth of tax refund. But, when it comes retirement time at age 59 and a half, or whenever that may be, when you take the money out of your traditional IRA, that’s gonna be a, on your income tax form, right, you have to take tax on that. But when you take it out of your Roth, nothing, tax free. So that’s a tough one, it sounds good, but that’s like years from now and people can use money now. So it’s kinda tough, yeah?

– So, it’s just the opposite effect, so it’s, you know, it just depends on what suits you now. There is also some rules with the Roth IRA and I’ll tell you what they are. As an income earner, if you earn over a certain amount of money every year, you’re not eligible for the Roth. And, I believe in 2017 that number was somewhere in the $120,000 range for an individual and for a couple it’s somewhere right around $200,000 or so, maybe a little bit less than that. So, let’s say, for example, $120,000 for an individual, $200,000 for a couple, if you earn more than $120,000 as an individual, you’re actually not eligible to contribute to a Roth IRA. So, who does a Roth benefit? Typically it would be someone who earns less than that amount of money. Of course, there’s still, even if you have a 401k plan that you could, you know, you’re getting some tax breaks on you can still do this, assuming that your gross income is still less than $120,000 or as a couple if it’s less than $200,000 assuming you do a joint filing.

– Before we go into that, that’s actually really important and what I want to get into next. But let me just make sure I can make sure this is, you know, everyone understands this part. Basically with Roth IRAs, because it has such a great tax free benefit at the end, rich people need not apply, is that basically what it boils down to?

– That’s absolutely correct.

– I mean, basically the government doesn’t want to give, what is a very substantial tax free benefit to the folks who are already wealthy. So, you know, but the thing is, you kinda have to be wealthy to do this otherwise, you would use the traditional IRA. So it’s kind of like in this in between, murky area, is that fair to say?

– Yeah, governments not stupid.

– And then, you were about to jump into combinations and who can do both. So, yeah, that’s my one questions. Okay, so let’s say I’m a mega saver, I’m a hoarder, I’m a, what do you call it, minimalist. And I don’t spend any of my money, can I just do all three? Can I do a 401k, an IRA and a Roth, is that possible?

– If you have a 401k plan and you do a traditional IRA, typically they’re not gonna allow you to do that deduction, so it makes no sense, it doesn’t make sense for someone to do a traditional IRA if they’re already contributing to a 401k plan. I should say, there’s limits to how much they can deduct if they’re already contributing to a 401k plan. And that’s, I guess, something that they would have to talk to your CPA about. But, in the case of a Roth, even if someone’s contributing to a 401k plan, yes, they could still contribute to a Roth as well. And in the case of a Roth and a traditional, you cannot contribute to both, I take that back. You’re only allowed to contribute $5,500 a year but if you want to break that down and put half into a Roth and half into a traditional, technically you can, but there’s really no benefit to doing that, so. Now, in a Roth IRA though, let’s say if it’s for someone who does not contribute to, does not have a 401k plan offered to them, then, a Roth might make sense as long as they meet that eligibility requirement with their income.

– Let me make sure I’m understanding this correctly. If you’re lucky enough to work at a company that offers a 401k with match, take it and, you can’t do a traditional IRA on top of that but you may be able to do a Roth on top of that if you’re a very aggressive saver. Is that accurate?

– Top of a 401k plan, yes.

– If you’re not eligible for a 401k plan, you should do either your traditional IRA or your Roth IRA but you really can’t do both. You can kind of split that $5,500 amongst the two of them, that might work for some reasons but more typically, you should just choose one of the two. Is that accurate?

– Yeah, pretty much.

– What about spouses? If my wife gets a 401k from her company but I, you know, I don’t, how does that work? Can I do an IRA or a Roth, does that impact the rules at all or is it on an individual basis?

– It’s, as long as you’re joint filing but as a couple you can both contribute and that means your income, your contribution limits will double. When doing so, it’s important to kind of incorporate everything that you currently own already but also mix that in with what your, really what your goals are and how you want to live at retirement. If you want to be the one who travels all over the world or do you want to be someone who, you know, kind of just relaxes at home. You know, what’s your standard of living that you want at retirement and so on and so forth.

– Which one is yours, where do you fall in that range, what’s your retirement goal?

– My retirement goal is to play golf every day and not have to worry about a single thing in life.

– That kind of sounds like your life right now.

– I wish.

– Anyone who is interested in getting in touch with my awesome, childhood friend Jason, I’ll make sure to include how to get in touch in the show notes. Jason, thank you again so much for jumping on here.

– Oh, my pleasure.

– Otherwise, everyone don’t forget to hit subscribe in iTunes or Android and go to to join the email list for regular updates and special offers. Alright Jason, we’re gonna sign off. Thanks again and bye everyone.

– Bye, take care.