401k vs 401a This is a topic that many people are looking for. newyorkcityvoices.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, newyorkcityvoices.org would like to introduce to you 401a Plan – What is a 401a Plan. Following along are instructions in the video below:
“Number one my name is derek. Ifasi i m the owner of a fasiq financial financial group in retiresharpcom. Today s topic. I want to discuss with you.
What is 401 a plan and go over some of the different pros and cons. If you re just maybe starting off your working career or you ve been working for a specific entity for you know a bunch of years now and you re looking how to properly maximize the growth in this type of plan and then also safely take distributions and try to create an ultimate goal for a successful retirement. Those are some topic. Though zar.
Some of the topics. I want to cover during this video. So a for one a plan it s very very similar to a 401 k plan. Except for a very slight modification.
So ultimately. What s happening is an individual is working for a specific entity in this case to qualify the 401. A it has to be possibly like a government institution. It could be a school like a nonprofit organization.
There s a couple of other criteria. What i want you guys to think of is kind of thing at this for one a as a type of bucket so when an individual is working for that specific entity. They are getting paid some sort of salary is some sort of income each and every year. So as the company s paying them that income to the individual this individual now has options that they could go and contribute into a type of retirement plan.
So this is qualified through the irs as a qualified employer sponsored retirement plan. Meaning that you have certain stipulations. You can t pull this money out before fifty nine and a half if you re trying to do rollovers. You have to wait until either.
A new employer plan takes over or you sever employment. You re going to another entity. You you hit your 59. And a half age two to basically retire do an in service.
Which royal in service of rollover. So there s a couple of different things regarding this bucket. But the ultimate premise of this is this individual is getting paid a salary they could take either a set portion of dollars each and every month into there or they could go and take a percentage of that salary place it into this type of bucket and try to grow this bucket more and more so one of the one of the the key facts about a 401. A plan is the control that that employer has over those individual plans like if they really like a specific employee.
Rather than a 401k that is non biased. Meaning that essentially everybody has to have the same sort of match. Everybody has to have the same sort of you know vesting schedule they can actually cherry pick specific individuals with these types of plans it doesn t really make that large of a difference. But they could essentially incentivize somebody from staying at this company larger.
If let s say they have one individual that is putting 10 of their salary and their gaming. That person like a 5 match as opposed to another individual is putting 10. They re only giving a 3 match well. Obviously the larger the match the more beneficial that is for the individual situation that has that 401 a point so some of the other components are like a like with the 401k they could give you options that give that employer or sorry that employee options to either contribute into it or not contribute with a 401.
A they might make it mandatory to contribute in to those types of plans. So ultimately. What s happening is this individuals taking a portion when they get what they re getting paid throwing into our type of retirement bucket and trying to grow this bucket as much as possible so that you have more dollars by that time you re ready to retire to therefore take distributions and utilize that a couple of different ways. So.
The first benefit is definitely the match. If you have a 401. A plan and there s a specific match involved well it typically makes the most sense to place in whatever that matches. So if someone s getting paid a hundred thousand dollars and they have a three percent match from their employer.
And they throw three thousand dollars into this plan well then the employers throwing another three thousand dollars. It s matching. So that means for that year six thousand dollars went into that was a contribution into that type of plan and if let s say this person has a three percent match..
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They throw. Ten thousand dollars into this plan. Ten percent well the match is still only three percent. So that s why a lot of individuals they over fund.
This and eat or they get caught up with the verbiage of saying a 100 percent match. And that s not typically the case. What happens is you have a hundred percent up to a specific percentage amount or might be like fifty percent up to six percent to say if you go and you put in six you know. Six thousand dollars in that example six percent.
They re going to match you 50 of whatever that is that would be 3 or 3000. So there s a whole slew of different things. But understand that matches is ultimately free monies that the employers trying to incentivize the individual from jumping ship and going to a different company. They re saying if you stay consistent with this plan.
We re not only going to pay your salary. But then on top of it we re going to give you some free money towards your retirement and try to invest that based upon our platform of options so if we understand that essentially that that bucket idea is your dollars are going in there the employer might be giving you a match those dollars are going in there well that s obviously going to grow that bucket. But there s a caveat to that to that concept is the percentage rate. That s also going to come back that s tied to that bucket what i mean by that is with these 401.
A is very similar to 401k plans is you might have a whole slew of mutual fund related options where stocks bonds ets mutual funds that you could choose to essentially grow this account further but that comes at a risk. It comes at a cost so with these 401 a plans you have a specific cost involving. What those funds are and then on top of it the most important cost. I believe is downward market loss or the most important risk is obviously downward market loss potential and this was very apparent in 2008.
We had individuals that lost some individuals lost 30 their portfolios other individuals lost 60 of their portfolios. So in theory. If someone was going and they re kept placing more and more dollars into this they were getting the match. Didn t really matter how much that they were placing and how much was matching yes.
That was growing the bucket and this additional interest credit. If let s say that mutual fund performance of the stocks bonds etf performance. It was was positive for that year well un yes. They re going to essentially double compound that growth into this bucket.
So it would be the dollars that they re placing in there. The dollars that are being matched and then if this came back positive well then that that s ultimately going to have a much larger bucket. But if let s say they were placing those contributions. They experienced a type of 2008.
A market reset and they lost 50 percent their portfolio. Let s say if they go and they put in you know 300 thousand total throughout all those years. It grew up to 500 thousand and then they hit a 2008 and i wiped there it cut their you know their portfolio in half that cut their account in half because this had a 50. Loss well now they d be walking into that next.
Year at 250000. Did not matter how much they placed in there obviously. That s going to help because if you don t put anything into that plan then obviously you re not going to have anything in that plan. But it s very crucial to really understand this component of that interest credit and there s ways on how you could do that very effectively very efficiently and at the end of the day.
What are we trying to accomplish we re trying to make this bucket larger. We re trying to have a larger bucket so that by the time it comes by the time you want to retire well obviously. It makes more sense. If you have six hundred thousand dollars in this bucket.
You could do more things with that money then as opposed to having a hundred thousand dollars in that bucket you know so you could splice that up a whole portion of different ways. So that s ultimately when individuals have this 401 a account. It s very similar they might have like a 401. A they might have a four 1 8.
And 1 4. Ruby. A 4 1..
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A and a 401 k depending upon their situation depend upon their employer. You know i ve seen it. Where an individual s like working for a hospital and one wing is a private sector and the other wing is is a public sector. So they might be offered both the 401.
A and a 401k or 403b and a 401 k. So it just it really just depends. But ultimately understand that the money that s being placed into these these these buckets. They are known as pre tax.
So they re growing into this account tax deferred the interest credit that s being credited into that account that s grown tax deferred. But when they re looking to pull out distributions from that account like after they hit age 60 and they re in the retirement years. All those monies are going to be fully taxable because they haven t played they haven t paid money s on those they haven t paid taxes on those monies. Yet.
So. The number one problem that individuals make with these 401. A accounts is they just set it and forget it you know i always ask i said you know what was the mechanism. What was the what was the strategy on how you chose your 401.
A options you know regarding your specific employer sponsored retirement plan and so i just kind of looked at you know past performance. I just kind of took a guess and that s not going to be enough because those individuals in 2008. They all took a guess and then thought that they saw this growth from 1980 through 2000 of the market thing into the markets always going to be going up. I was going to be going up and they ve unfortunately were planning on retiring and within a couple of years and everything got pulled back because the market is nothing more than a stock market then add in a casino.
Then i ve been a you know a market gamble and there s ways on how you could choose those funding options. Most effectively most efficiently. If an individual let s say that they have an old 401. A and just kind of still sitting with that previous employer and they switch over to a new employer well.
Then you have a whole slew of options you could roll over this 401 a into a specifically designed ira. Account that has a very similar growth potential. The problem with the 401. A is you have limited funding options so that percentage rate.
What that s linked to like those. Mutual funds. Etfs stocks bonds that i was talking about you might have anywhere between 5. To 20 different options to choose from with the 401 a if you go and you do a rollover so you could only choose that many eggs in your basket.
That many and hopefully. There s enough good eggs to you know to choose from to make it very effective to have a good effective growth in that if you go. And you do a rollover into an ira account. Well you might have 3000 different eggs to choose from you could splice.
It up specifically to your exact age. What you re trying to accomplish on a growth on a conservative rate. You know there s a whole slew of different things so understand if you sever employment and you have those old accounts. Sitting.
There there s ways of how you can effectively rollover those monies just specifically designed ira contracts they either work very similar regarding. You know uncapped growth uncapped lost potential or you could have them ones that give you more of that consistency something more along the fix or you could utilize indexing strategies as a you know a different thing of options now another option. That s that s a you know very favorable is when an individual hits age. 59.
And a half usually they re able to utilize this 401 a money s even though they re still working for the company and they re able to do something known as an in service. Rollover and in service with rural and you could set that up into a whole portion or a whole myriad of options that will pertain to your exact retirement. Goal and what i mean by that let s say if you have a 401 a retirement accountant sitting at like five hundred thousand dollars and you re currently age 60 and you understand that you want to retire at age 65 and say okay at 65. I want to trigger social security income.
I just basically want to call it quits. I don t want to work anymore. I don t want to kind of ride off into the sunset well with those sorts of plans it s known as a retirement income strategy and we typically recommend and it goes more specific than this but the generalized version of this is to say that okay what are your income sources at that age 65..
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What are your emergency funds at that age 65. What is your inflationary protection at that age 65. So let s say this. Individual that s age.
60 and let s say that they need 50000 of income for the rest of their life. At age 65 meaning that these are their expenses and when we utilize different budget. Analysis we understand that they need four really easy math 50000. Each and every year from age 65 to the rest of their life.
So if they re not offered a type of pension plan and they said well i just have my social security income well that s going to be a set income stream. That they can never outlive so maybe their social security income comes in about thirty five thousand dollars at that each. 65 is just this hypothetical example and they have this 500000. Of this 401 a account that s sitting.
There well rather than roll. The dice and do what individuals did in 2008. To say. Oh.
I m so close to five years away. I ll just stay consistent with how i m setting up my growth strategy. I always recommend or i give them the option to say hey this is some food for thought. Why don t you look towards securing that a little bit better and you set up something on a more scientific approach more mathematical analysis to say what s the smallest amount of dollars.
I this five hundred thousand that we could roll over into ira. One and possibly put it with like an insurance company. One of their annuity product lines. Once i give you control ones that you re not surrendering not a newett.
Ization but like a hybrid. Type annuity ira that will provide you that 15000. So maybe at this at this timeframe at their age 60. It s going to cost them two hundred thousand to place into an account that will group that will be deferred for five years.
And then trigger lifetime income to them for exactly that fifteen thousand dollar gap to equate the thirty five thousand plus of fifteen thousand would equal that fifty thousand dollar goal so with that we still have three hundred thousand remaining rule of thumb is you want to keep about six to twelve months of emergency fund. So let s say another fifty thousand dollars. They roll over a portion of that into an ira money market account. So that s a really liquid cash something that they re not looking to have growth.
But they re not looking to have losses on if an emergency you know if i help if a health situation occurs if some sort of emergency occurs. But no my guy always called oh my gosh moment occurs they could pull from those money successfully so then it s going to require. Fifty thousand dollars. So you use two hundred on the annuity on the ira annuity.
You use fifty thousand dollars in the money market. Account. And now you have two hundred fifty thousand dollars. You could do a whole plethora of options you could set up little annuity lettering strategies to say okay at age 65.
I might need fifty thousand dollars of income. But maybe at age sixty eight. I might need fifty two thousand dollars because these expenses a portion of them are going to be fixed a portion of them are going to be inflationary. So you can set up these micro annuity contracts with michael a turing strategies to provide you more and more incomes every few years to just essentially step up or you could say at this point.
In time. I m eligible to place them to specifically designed ira contracts. Why don t i just go through that same growth strategy. But make sure i m going i m utilizing the highest quality funds at the cheapest possible cost much cheaper than what the 401.
A or a lot more plentiful. Options. Then the 401..
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A 5 to 20 different options. So it just gives you better eggs to choose from and this is when we re setting up this three tier this generic three tier safety. What does that do it gives you peace of mind rather than roll the dyson s they all worry about it when i get to 865 says. No i m going to set up an actual plan.
I m eligible because i hit my age fifty nine and a half my employer really just depends upon the 401. A employer and how that how that entire process works. But typically they allow you to take either a portion of this at all this and splice it up properly. So also for those next five years you could still be making contributions.
Yes. Your account value would be sitting at zero. So you d be basically making new contributions into that 401 a plan. But you splice this 500000 rather than go into one sort of niche.
You know one sort of income plan or one sort of you know emergency plan you re splicing them out correctly you could do multiple you could go three four five you know ten different types of ira contracts that are all serving a purpose. All by utilizing that that those monies and you were preparing before you actually hit that retirement. Age so it s all about. Preparation all that looking at 30000.
Foot. View saying. Where am. I am.
I right now how can i get there successfully. This is where we come in is we try to educate you guys the most effective way. There s some times that what the individual is doing we don t make any recommendations. We say you know you be a service to change anything because you re essentially going to be shooting yourself in the foot.
If you do so so it s all about you know each individual is going to be different. It s different than sitting at a seminar and having 50 people in the same room and then having one adviser pitch one sort of plan that s nonsense in my book. I just think that each individual s going to have an individual situation. And it has to be setups.
Because there is no room for error in retirement you make one large mistake. And then you re going to be working well into your 70s your you know your your 80s. Sometimes in worst case scenarios of saying. Oh my gosh.
I had this money. I had you know i was right there. And i we hear the stories all the time so this is why this is my passion to always make these videos. And do the radio and all that stuff to give you guys as much free education out there so at any point in time you find value in this video.
You want to give us a call. We re available 24 hours a day seven days a week mornings nights weekends holidays. Whatever the case may be we raise a plus in the better business bureau. We re accredited business with them and i think it s because of the methodical process.
We ve always had very good reviews. We ve never had any complaints. It s because we try to educate you guys first and it s more transparency. It s not just us beating.
You over the head telling you you know why we re so great it s more along the lines of what s your situation. Let s figure this out together and we re there to to give you the tools you know required to have a successful and most importantly. A confident armen so i want to thank you very much for watching this video. Please feel free to subscribe to our youtube channel retire sharp.
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