Retirement, 401K, IRA accounts

[humbeez]

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I just became licensed and all this 401K, retirement stuff is really confusing. So I already know that the max pre-tax that you can contribute to a 401K is 16.5K and if you take it out early (before age 59) you get penalized. My questions are
1. Once you retire, are taxes taken out then?
2. If so, can you avoid being taxed on in by rolling it over to an IRA account and will there be tax when making withdrawals from this IRA account?
3. Could you highlight the benefit of maxing out 401K that will be taxed upon retirement vs. just putting money out of your taxed check into a bank account every month that you don't touch (this way, you know what's in it is yours and you don't have to worry about taxes)?
4. Lastly, I work for a company that matches about 2% of your gross to your 401K, from my calculations, this only comes out to ~4K, is this really worth it?

Thanks for any responses

 

[gotdrugs]

I just became licensed and all this 401K, retirement stuff is really confusing. So I already know that the max pre-tax that you can contribute to a 401K is 16.5K and if you take it out early (before age 59) you get penalized. My questions are
1. Once you retire, are taxes taken out then?
2. If so, can you avoid being taxed on in by rolling it over to an IRA account and will there be tax when making withdrawals from this IRA account?
3. Could you highlight the benefit of maxing out 401K that will be taxed upon retirement vs. just putting money out of your taxed check into a bank account every month that you don't touch (this way, you know what's in it is yours and you don't have to worry about taxes)?
4. Lastly, I work for a company that matches about 2% of your gross to your 401K, from my calculations, this only comes out to ~4K, is this really worth it?

Thanks for any responses

1) If it's a Roth 401K - no. BUT - you will be taxed on the money you put into the account - the governement is going to get it's tax money one way or another.
2) See above - somewhere along the line you will have to pay your taxes - it would be either now (if you are eligible to roll it over into a Roth IRA) or later (if a traditional)
3) the biggest benefits are reducing your tax burden now. Also you will get more exponential ROI - but that gets counterbalanced to a degree when you start to withdraw.
4) take ~4K x(you are going to make 200,000 a year? or do you mean the 2K you put in plus the 2K they match?) 30 years of doing that, assuming a annualized annual return of 5% (which many financial "experts" are starting to state that as the more realistic assumption) and you get just shy of $280,000 dollars 30 years from now after contributing 120K yourself. To determine if that's worth it or not is up to you and a personal decision.

 

[oh no dont stop]

If you max 401k at 16.5k (assuming you don't increase for "catch up" contributions) for 30 years your portfolio will look as follows:

AVG 2% growth/yr: $699,260.71 (input $495k, growth: $204,260.71)
AVG 3% growth/yr: $825,044.19 (growth: $330,044.19)
AVG 4% growth/yr: $978,917.53 (growth: $483,917.53)
AVG 5% growth/yr: $1,167,553.03 (growth: $672,553.03)
AVG 6% growth/yr: $1,399,227.68 (growth: $904,227.68)
AVG 7% growth/yr: $1,684,205.18 (growth: $1,189,205.18)

Assuming you are 26 years old, you can potentially retire with these numbers (or more) at age 56. Depending on the retirement lifestyle you choose.

If your just building up money in a savings account that has already been taxed, your essentially throwing away free money. You are taxing yourself because 1) You've payed taxes on that money already 2) That money is not growing, and likely devaluing due to inflation.

401k allows you to take pre-tax $$$ and (in theory) outpace inflation and grow. Also depending on your employer's 401k management company, you are likely to have a wide range of investment types for your portfolio. These range from high risk to low risk. If your not sure about where you should be investing, you should seek professional help.

But to answer your question, yes: 401ks are definitely "worth it" compared to stashing money under your mattress. Diversity is key!

 

[humbeez]

4) take ~4K x(you are going to make 200,000 a year? or do you mean the 2K you put in plus the 2K they match?) .

I mean my 2k plus the 2k they match...haha i wish i could make 200K a year

I knew there was something I was not seeing. I guess I am still uneasy with the fact that although I will contribute to this every paycheck, I can't touch it...for more than 30 years or I'll get penalized. But it sounds like the benefits definitely outweigh the cons.

Thank you both for your insight!!