Listen: Uresti, 401K, Four One K discussed on MAD MONEY W/ JIM CRAMER - Full Episode
"One k. plans can be a real mixed bag. With a couple of really great features. A lot of bad ones too, and those bad futures will eat away at your returns to your ears, sometimes fees that are almost totally hidden from you that actually are quite upsetting to me. So let me lay out the good, the bad and yoga, four one k. plans, and then I'm going to tell you whether it makes sense for you to contribute more money to your own four one k. or maybe that cash better place better you somewhere else? I the good the best thing about a four. One case it's tax deferred investment vehicle, you pay no taxes on what you put in. Then you never pay a penny capital gains taxes on the profits you make within your 401K, which allows your money to compound Uresti or compounding. Just being fantastic decade after decade. Totally. Tax-free decide to start making withdrawals. Regular viewers of this show in meters of my books know that I'm a huge believer in the power of compound ING. So let me give you an example. Suppose you're thirty years old and you start investing five thousand dollars a year to your four one k. and remember you're not paying any income taxes and that five thousand contributions pretext income. If you choose your investments wisely. You should be able to generate press maybe as much as seven percent return on average. So over the course of the next thirty years, you'll be contributing one hundred and fifty thousand dollars to your 401K plan. But because that money's able to compound your to your without any capital gains taxes. By the time you're sixty five thousand dollars per year. Pretext income well could be worth over five hundred, eleven thousand dollars. If you had to pay taxes on dividends and capital gains believing that number of much would be a lot lower perhaps as much as one hundred ten thousand dollars lower. That's how important compound is you in avoiding? Well, let's say the tax deferred nature of the thing you you only ever have to pay taxes four k. money once that's when you decided to withdraw it that what you were throws taxes, ordinary income. And since likely be retired by them, most of of you will end up paying a lower rate than if you've been taxed on that money when you first earned it while you're still getting this higher rate levels. Okay. So that's one major reason to like four one k. plans the second many, but that'll employers will match or partially match your 401K contributions. In other words, for every dollar you invest your 401K plan, your employer, my throw and say, fifty cents up to a certain point that is free money and you must almost never want to walk away from free money, especially again when it's also untaxed, but if you don't get free money from your player for contributing to four one k. then I think it's a much less compelling option. Frankly, because as I said before, there are a lot of things about a 401K plan that can be really bad, which is why. If again, you don't get a match from your employer, I it's a better idea to save for retirement, be the individual retirement account IRA which has the same exact tax favored status as a 401K. You can only contribute fifty five hundred dollars a year."