Boone asked in Business & FinanceInvesting · 2 weeks ago

What is the point of a 401k?

If you can buy ETF's with most brokerages, what is the point of adding to a 401k where your money is on lock down until age 65 (may be wrong on the age but you get the point)? The only reason I can see is to get a company match. Other than that, why contribute to one rather than just purchase ETFs and/or mutual funds?

13 Answers

  • B
    Lv 7
    6 days ago

    most companies provide a match, so if you have a 401k and put in 5% of your salary, the company usually will match it 50%, about 2.5%, so you get 7.5% of your salary into the 401k each year. you don't get any match on your own.

  • Steve
    Lv 6
    2 weeks ago

    Many people are unaware or scared of investing in something they know little to nothing about. There are many horror stories about people losing a lot of money because of the market out there to scare any one who doesnt know better. A 401k on the surface just seems like a safer option and, honestly, a lazy option for those who dont care about looking for other options for ones financial future. Yes, everyone is right about tax advantages and whatnot, but at the bare root of it all is laziness in my opinion. Who thinks about tax breaks if you dont think beyond that and making more money? If youre thinking about saving money being taxes, then you are likely to be smart enough to think beyond taxes and how you can make more money. 

  • 2 weeks ago

    Because the 401k contributions and the matching funds will grow tax-free all those years, and the growth on the money you would be paying in taxes can amount to several years worth of retirement income.

    ETFs are only one type of investment and those can be had inside a 401k or IRA. You've apparently bought into the myth that they are some kind of new, magical thing. They don't avoid you taxation on gains when you sell if you have them in a taxable account.

  • 2 weeks ago

    Tax advantages.

    With ETFs or mutual funds, you pay tax on all the money you make at your job, and you pay tax every year on the dividends that the ETF or mutual fund pays while you own it, and you pay tax on the capital gain when you sell it.

    With a 401K, when you earn money at work, you don't pay income tax on the money that's going into the 401K and you don't pay tax on the capital gains and dividends either while they are in the 401K. You do pay tax when you take out the money, but then you'll be retired, so your tax rates might be lower.

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  • DEBS
    Lv 7
    2 weeks ago

    401k is pre-tax money.  That means your money grows faster and larger.

    The point of a retirement account is to use it for retirement.  If you're willing and desiring to access and us the money prior to retirement, then it's just an investment and you don't really have a retirement plan.

  • Eva
    Lv 7
    2 weeks ago

    The company match is free money. Depending on how much the company matches, you could be leaving thousands of dollars on the table. The investment within the 401k grows tax deferred (or tax free in the case of a Roth 401k). The money you put into a regular 401k is pre-tax so it lowers your taxable income on your W2. Between the tax saving and the match, you would probably earn more than you would in an investment in a standard brokerage account.

  • Anonymous
    2 weeks ago

    I put $18,500/year into a Roth 401k and another 6k into a Roth IRA.   The difference between you and I is that you will be paying capital gains tax to access your money and I will be paying zero tax.    I will also have advantages when it comes to estate planning that you will not have.  In the meantime, if you bought a stock ten years ago and have a significant gain but want to dump part of that stock, you're going to pay tax.   I won't. 

    I agree with you on not having the bulk of one's nest egg in pre-tax retirement accounts especially if one retires with significant assets.   Retiring Boomers with seven figure nest eggs are discovering just how screwed they are with income taxes and required minimum distributions  - and let's not forget higher medicare premiums because those are based on taxable income.    Roth distributions are not taxable income.

    By the way, contributions to Roth accounts are not "locked down" until retirement.  One can withdraw them at any time without penalty (contributions, not earnings).

    Pre-tax retirement plans are good for people who intend to retire frugally.  Roth retirement plans are the best free lunch the government will ever give you especially if you will have accumulated wealth. 

  • 2 weeks ago

    You mean other than its tax deferred, you don't pay taxes on interest, dividends or capital gains realized inside the plan. Considering most plans are invested in mutual funds and most pay out quarterly dividend and annual Short Term and Long Term Capital Gains distributions, that's pretty nice. Plus many places offer a Roth 401K option which lets you compound investments tax free through your career and then take the distributions in retirement tax free. 

  • 2 weeks ago

    The reason (other than the match) for a 401K is that the portfolio can accrue without capital gains.  To give you a simple example; suppose at the age of 30 you invest in an ETF that goes from $10 a share to $50 a share by the time you withdraw the investment at a age >65 you will not be hit with a capital gains tax on that $40 uplift.

    Depending on the type of 401K (Roth or conventional IRA) you may also be able to make your contributions out of pre tax earning although in general a Roth works out better in the end.

    • Lois Griffin
      Lv 6
      2 weeks agoReport

      401k distributions are taxed as ordinary income, not capital gains. 

  • 2 weeks ago

    The employer match is the big one, but the tax advantages are another.  The trade-off for not getting to touch your money until retirement is that it gets to grow tax-free.  

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