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How to maximize your 401K savings

Contribute to your employer sponsored 401K plan

  • Employer sponsored retirement plans such as a 401k’s sometimes provide company match in stock or cash contributions
  • The plan participant can contribute up to $18,500 a year to a 401k plan
  • This match can vary from company to company, but a large employer that I serve many clients from matches 50% of the employee’s contribution up to 7% of their gross pay. That is free money from your employer!
For example:

If you made $100,000 a year and you maxed out your contribution to 7% of your gross pay, you would contribute $7,000 a year to your 401k. Then the employer will contribute $3,500, as their 50% match on your $7,000 contribution.

That $3,500 employer match is free money and there is no reason you shouldn’t contribute the max allowable under your employer sponsored plan

  • The investment options afforded to you in your 401k plan vary wildly and are dependent on who your employer selected for the plan. The big players in the 401k space include: Voya, Fidelity, Vanguard and many others.

Open a Self Directed Brokerage Account in your 401K plan

One piece of information that isn’t advertised widely is certain 401k providers have a Self-Directed Brokerage Account option, otherwise known as (SDBA)

  • This SDBA allows 401k participants to have more investment flexibility than choosing the generic investment funds or target date funds in their current 401k plan
  • The SDBA allows individuals to purchase Index ETF’s that have lower expense ratios than an equivalent fund in a 401k plan
  • The SDBA allows individuals to invest into individual stocks and take more risks, while potentially generating higher rates of return. (More risk also can mean bigger losses as well)

The best analogy I can come up with for choosing a tailored individually stock picked portfolio instead of a 401k target date fund is:

  • A traditional US equity fund in a 401k invests into the entire US stock market. The fund selects stocks that are good and bad. The fund owns the best performers in the market “Amazon” and the laggards “General Electric”
  • The tailored portfolio has the ability to throw out the underperformers in a portfolio and select only winners like “Amazon”

I always advocate for 401k participants to open an SDBA, especially when they are in the “wealth accumulation” phase of their life. The individual can afford to take an increased level of risk and strategically pick stocks and ETF’s that will perform better in a portfolio.

Once you maximize your 401k contributions to the level at which your employer will not match anymore, you should contribute any additional retirement savings into a Roth IRA and Traditional IRA.

Open a Roth IRA

  • You contribute after tax dollars to this investment account (up to $5,500)
  • You are allowed to withdraw the principal before retirement without penalty
  • You will be taxed on any gains if you withdraw before eligible retirement age
  • Withdrawals (Distributions) are not taxed in retirement
  • You can use advanced investment strategies such as options trading

Open a Traditional IRA

  • You contribute after tax dollars, but you are allowed to deduct contributions (up to $5,500)
  • Early withdrawal penalty and ordinary income taxes apply to pre-retirement distributions
  • You are taxed at ordinary income rates on any distribution in retirement
  • You can use advanced investment strategies such as options trading

Each one of these accounts allows up to $5,500 a year contribution. The benefits of an IRA or Roth outside of your 401k plan is these accounts allow tremendous investment flexibility to choose individual stocks and extremely low expense Index ETF’s. Typically, you cannot rollover a 401k into an IRA until you retire or leave your employer. But check with your plan’s rules, sometimes they allow
distributions when you reach age 59 and ½ to perform a direct rollover into an IRA.

Don’t Diversify if you can afford the Risk

Warren Buffet once said “Diversification is protection against ignorance. It makes little sense if you know what you are doing”.

  • If you are young and in the growth accumulation phase of your life, you should take an increased level of risk and pick individual companies that you would love to own for a long time
  • Wait to diversify your portfolio, it is for wealthy individuals with $1,000,000 plus in assets
  • Invest in companies you know a lot about and hold them through all the twists and turns in the market
  • For most investors, a buy and hold strategy will outperform attempting to time the market

If this article was informative, but you don’t know how to apply this to your own finances. Contact me and we can set up a consultation.

This market commentary was created by Dylan Quintilone Investment Advisor Representative of Copper Canyon LLC. Copper Canyon LLC is a State of Florida Registered Investment Advisor. This should not be taken as investment advice and any forward looking commentary should not be construed as investment advice. If you have any questions about the stock market or investing, seek the guidance of an investment professional.

Dylan Quintilone CRD# 6732024

More information can be found about Copper Canyon LLC CRD#286061 at https://brokercheck.finra.org, by typing Copper Canyon LLC into the search box.

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