Today on The Wealth Secrets Podcast, Sean Adams talks about everything there is to know about 401Ks. He dissects the myths, the benefits, the drawbacks, and, most importantly, why the super-rich often shies away from signing up for the 401k.

[01:55] Understanding The 401Ks

[06:50] The Benefits of Having a 401K Account

[07:58] The Reality of the 401Ks

[11:18] The Strict Withdrawal Rules

[17:59] 401Ks Management Fees

[25:02] The Risk Associated With Market Exposure

[27:40] The Contribution Limits

[31:30] Alternatives to 401K Accounts

Understanding 401Ks

Before the 1970s, employers used retirement benefits to hold people hostage to their jobs for an extended period. With this in mind, Ted Benna, the man who invented the 401Ks, wanted something that the government would approve to help combat the disappearing pension plans. The account might have solved several employer-employee issues, but Ted also admitted that he created a monster that has evolved into something more complex than initially envisioned.

The 401k is the most common account prescribed in corporate America and small businesses because it seems fairly straightforward to implement. However, that's usually not the case because there is a lot of stuff going on behind the scenes you should know about.

Benefits of a 401k Account

The accounts let employees contribute pre-tax salary dollars directly from their pay cheques. Employers can also decide to contribute or match what you put in. The fact that employers could match a certain percentage of your contribution towards your retirement was the initial appeal that got most people signing up for the accounts. Other than the tax advantage gained from pre-tax dollars and the matched contributions from employers, we believe that the 401Ks don't offer any added advantage towards your portfolio.

The Reality Of The 401Ks

401Ks enjoy tax benefits through pre-tax contributions. This might seem like a tax haven for most people, but the reality is that this action is only comparable to shooting yourself in the foot. You might not be paying taxes during contributions, but once you retire and get a hold of that money, you'll automatically start paying taxes. We all know that your taxes and tax brackets will change over time and that there is a huge probability of it being higher in retirement than it was during contribution. This means that you're practically deferring your taxes to some date in the future when your tax percentages will be higher.

Another thing you need to note is that you're essentially not allowed to touch the money. In theory, this might be the best approach because it ensures we don't start eating into our retirement savings. 

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All shared information from the Wealth Secrets Podcast should not be taken as legal or financial advice. Please consult with a professional before making any decisions.