All of my investments in my 401k? | 3rd Level Wealth
What happens when all of your investments are in your 401k?
You did everything right. You got the degree, you got a great job, you are very good with your finances, you got married and had a couple kids with a nice home and took vacations all over the world. You are living the American dream aren’t you?
And let’s pretend you followed some sound financial advice and you started investing early on in your career into your company’s 401k. And each year you increased your savings until eventually you were able to max out your 401k ($22,500 for 2023). Life is still grand. You have built up a large nest egg in your 401k.
But what happens when you no longer love your job? Or the manager you really liked gets promoted and the one who replaces them is the worst? What happens when you start to question if what you’ve done the past 20 years is really what you want to do the next 20 years? What options do you have?
What if it became obvious that you wanted to do something different the second half of your life, but couldn’t take the time to do so or figure it out because all of your money was tied up in your 401k?
It’s a pretty dramatic scenario but maybe not all that far fetched. It is not uncommon for people who are really good at saving to have all of their money invested in a tax deferred employer plan such as a 401k. What does this mean?
Usually it means the money cannot be withdrawn without penalty until age 59.5. Tax diversification is important for flexibility in planning now and the future.
This is why it’s important to understand which type of investment account you are contributing into and what the tax consequences are and will be. There are only three types of accounts in how they are taxed by the IRS; tax deferred, taxable and tax free.
Which accounts are your assets in? How soon can you access them without penalty? What tax bracket are you in currently? What tax bracket are you planning on during retirement?
All of these questions have a major impact on your financial plan. These should be asked and answered with clarity. Although we cannot predict the future, we can certainly plan for it and adjust as necessary.
3rd Level Wealth
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