Although this module deals with the very basic concepts of 401k investing it is imperative for Plan investors and their advisers to grasp the foundations of investing via tax deductible and tax effective vehicles – which 401k Plans offer,

1) The tax deductibility of 401k Contributions

2) The tax exempt status of earnings while remaining in a 401 Fund.

You may need to brush up on Economics and Basic Math to do the calculations for assessing the investment returns.

The first item to examine is the absolute return on the initial 401k investment (assuming maximum contribution is made)

Each year the limits on Maximum contributions is raised during the year. Currently – 2021 the maximum personal contribution a worker may make to their 401k fund is $19,500 and likewise the same limit applies to Matching Employer Contributions to an Employees 401k Plan,

To help you with mental math you may regard the $19,500 as being $20,000

You do need to know TAX RATES – which vary in line with income and deductions

What is important at present is to appreciate the significance of the IRS Concession available to each worker

Assuming a max funded contribution by a worker of $20.000 the tax rebate is around $5,000 or a little shy

$5,000 deducted from the $20,000 outlay makes the cost of the contribution $15,000 and produces an ROI of 33%.

There are some mentally challenges people who swear the sky is yellow – whom we shall pass by.

Something which many Financial Planners are not up to speed with is the fact that a worker can pick up an additional $6,000 by working with their employer to repackage their wage. *(That will be dealt with in a subsequent lesson)

The 33% return a worker can make instantly the day they make their Personal 401k Contribution is a guaranteed tax free return. It is not dependent on returns from underlying investments – it is before funds are even allocated to specific investments.

In most instances the average worker is unlikely to have a spare $20,000 laying around. Therefore it is necessary for an investment loan to be used in order to make the necessary $20,000 investment.

This where many people shoot themselves in the foot – agonizing over the taking of a small loan to make a guaranteed return (Backed by the IRS)

The next obstacle people put up is the need to continue paying interest on that loan. Of course interest needs to be paid. It can be structured at around 5% a year and it is able to be serviced by the earnings of the 404k Fund. There are many sensible approaches to dealing with the initial $5,000 windfall *(also dealt with in a later lesson)

At this juncture the merits of a 401k investment should be obvious. What is no so obvious is a ,management strategy for managing the cash flows. However until the prudence of investing a 401k plan is acknowledged there is little point sprinkling pigs with pearls,