Podcast Summary: Money Guy Show – “How To Maximize Your 401(k) Strategy!”

Release Date: January 15, 2025

In this episode of the Money Guy Show, hosts Brian Preston and Bo Hanson delve into strategies for maximizing your 401(k) plan. They address listener questions, provide expert insights on retirement savings, and explore related financial topics to help listeners make informed decisions about their wealth-building journey.

1. Introduction to Maximizing Your 401(k)

[00:07] Brian Preston:
“401Ks how to maximize your strategy.”

Bo Hanson sets an enthusiastic tone, emphasizing the importance of small financial decisions that can lead to significant long-term impacts. The hosts express their commitment to answering listener questions and providing actionable financial advice every Tuesday at 10:00 AM Central Time.

2. Deciding Between Roth and Pre-Tax 401(k) Contributions

Listener Question from LP

[00:49] Megan:
“I'm 31. My 401k lets me pick a percentage for Roth and a percentage for pre-tax contributions. I currently have $7,000 in a Roth IRA and I plan to max out my 401k and my Roth IRA next year. My 401k matches 8% pre-tax. How do I pick my Roth percentage?”

Understanding Roth vs. Pre-Tax Contributions

[01:13] Bo Hanson:
Bo clarifies a common misconception regarding employer matches:

“Even if you choose to do Roth contributions, you would still get the match. It’s just that the match goes in your pre-tax bucket.”

He explains that both Roth and pre-tax contributions have their benefits:

• Pre-Tax Contributions:

  • Tax Benefit Today: Reduces your current taxable income.
  • Tax-Deferred Growth: Investments grow without being taxed until withdrawal.
  • Taxable Withdrawals: Taxes are paid upon retirement withdrawals.

• Roth Contributions:

  • No Immediate Tax Benefit: Contributions are made with after-tax dollars.
  • Tax-Free Growth: Investments grow and can be withdrawn tax-free in retirement, provided certain conditions are met.

[02:45] Brian Preston:
Brian congratulates LP for aiming to max out both the Roth IRA and 401(k):

“Every dollar that comes into your command and control has the opportunity for a 31-year-old to multiply 20.39 times by the time you retire.”

He emphasizes the power of compounding growth combined with tax-free growth, particularly advantageous for younger investors.

Factors Influencing the Decision

[03:58] Brian Preston:
Brian suggests that younger individuals, especially those in their 20s and early 30s, might benefit more from Roth contributions due to their longer investment horizon.

[04:00] Bo Hanson:
Bo discusses the implications of higher incomes:

“If you're high income and your tax rate is beyond 30%, you might lean towards pre-tax contributions... hoping that your tax rates in retirement will be lower.”

He identifies a "gray zone" for those with marginal tax rates between 25% to 30%, indicating a need for personalized financial planning.

[06:24] Bo Hanson:
Bo underscores the importance of personal finance being personal:

“It depends on your unique account structure, your unique goals, when you think you’re going to access these dollars, your unique risk tolerance capacity...”

He commends LP for being in a strong financial position, moving into advanced stages of wealth building:

“You're moving into step seven... and to be able to do that in your early 30s is amazing.”

[07:45] Brian Preston:
Brian notes that most individuals tend to choose either 100% Roth or 100% pre-tax contributions, and that a mixed approach like LP's is uncommon unless there are unique financial circumstances.

3. Incorporating Mortgage Principal Payments into Savings Targets

Listener Question from Foopa

[10:54] Megan:
“Thoughts on if you should include the principal amount of a mortgage payment in the 25% savings target since it's increasing the equity in your house and would it also increase your net worth?”

Analyzing Mortgage Payments and Net Worth

[11:13] Bo Hanson:
Bo explains the role of mortgage principal payments:

“Paying down debt is a good thing, especially when it is debt on an asset that retains value...”

However, he advises against including mortgage principal payments in the standard 25% savings target, emphasizing that:

“When you get to a 25% savings rate in step seven, it is above and beyond what you are paying on your mortgage.”

He affirms that once the savings target is met, additional funds can be strategically allocated, such as making extra mortgage payments to reduce debt faster or increase home equity.

[13:05] Brian Preston:
Brian elaborates on the distinction between building wealth and maintaining wealth:

“The typical American does not understand the difference between use assets and investment assets...”

He cautions against prematurely paying off low-interest debt like mortgages while neglecting investment opportunities that offer higher returns.

Brian highlights the Wealth Multiplier, illustrating how early investments can exponentially grow over time:

“Every $1 you have is worth... when you’re 20 years old, it's 88 times over. When you’re 30, it's 23. When you’re 40, it's 7.”

He advocates for prioritizing investment growth before aggressively paying down low-interest debts to stay on the path to financial independence.

4. Advanced Strategies: Charitable Giving and Tax Planning

Listener Question from Emily and John Page

[18:19] Megan:
“Thoughts on making the most of Fidelity Charitable for donor-advised funds?”

Maximizing Charitable Donations with Tax Efficiency

[18:37] Brian Preston:
Brian discusses the intersection of charitable giving and tax planning:

“When you use a charitable gift fund, you can fulfill your charitable goals without paying income tax on appreciated assets.”

He details strategies such as:

• Donor-Advised Funds: Allowing donors to make charitable contributions, receive immediate tax benefits, and then recommend grants over time.
• Appreciated Securities: Donating appreciated stocks or ETFs to avoid capital gains taxes and receive a charitable deduction for the fair market value.

[19:55] Bo Hanson:
Bo highlights the convenience of using platforms like Fidelity Charitable, especially when aligning them with existing brokerage accounts:

“If you use the same custodian, the transfer of securities becomes super, super easy.”

He advises donors to:

• Assess Giving Frequency: Whether they give monthly, annually, etc.
• Choose the Right Platform: Based on fees, transaction requirements, and personal giving goals.

[21:22] Brian Preston:
Brian offers an advanced tip for tax-efficient charitable giving:

“Use a charitable gift fund to stack your charitable contributions... you can set up automatic distributions to spread out your giving over time.”

This approach helps in maximizing tax deductions while ensuring continuous support for chosen charities.

5. Tax Allocation Strategies: ETFs vs. Mutual Funds

Listener Question from JB

[23:32] Megan:
“I've heard you talk about tax allocation. I recently switched all of my index funds in my taxable brokerage to ETFs. Is this truly more tax efficient or am I just counting pennies at this point? How do you know when something like that is worth it?”

Evaluating Tax Efficiency of ETFs vs. Mutual Funds

[23:49] Bo Hanson:
Bo explains the concept of tax location and its impact on investment strategy:

“High growth assets inside of your Roth, ordinary income type assets inside of your pre-tax accounts, and capital appreciation assets inside of your after-tax account.”

He differentiates between tax efficiency and tax location, emphasizing that while ETFs offer some tax advantages, well-managed index mutual funds can be equally tax-efficient.

[25:38] Brian Preston:
Brian elaborates on the tax efficiency of index funds versus ETFs:

“Both mutual funds and ETFs are pretty tax efficient... they don't have a lot of turnover.”

He notes that ETFs offer timing benefits, particularly regarding capital gain distributions, which can be advantageous depending on when investments are made within the tax year.

Brian advises balancing the focus between tax efficiency and overall investment strategy:

“The savings rate is so much more important than even the investment... Once your assets start reaching multiple six figures, you’re going to really want to start paying attention to where these assets are located.”

He cautions against overly focusing on minor tax efficiencies at the expense of broader wealth-building strategies.

6. Key Takeaways and Final Insights

• Personalized Financial Planning: Decisions about Roth vs. pre-tax contributions, mortgage payments, and tax allocation should be tailored to individual financial situations, goals, and tax brackets.

• Maximizing Growth Through Compounding: Younger investors benefit significantly from tax-free growth in Roth accounts, leveraging the power of compounding over decades.

• Balancing Debt and Investment: While reducing debt is important, prioritizing high-return investments can offer greater long-term financial benefits, especially for low-interest debts like mortgages.

• Strategic Charitable Giving: Utilizing donor-advised funds and donor-specific strategies can enhance tax efficiency while supporting philanthropic goals.

• Tax Location Over Pure Efficiency: Properly allocating assets based on their tax treatment and growth potential is more impactful than merely choosing tax-efficient investment vehicles.

7. Conclusion

Brian Preston and Bo Hanson wrap up the episode by reaffirming the importance of strategic financial decisions in maximizing retirement savings and building long-term wealth. They encourage listeners to utilize available resources, like the wealth multiplier tool on moneyguy.com/resources, to better understand the impact of their financial choices.

“Make sure the actions you're doing are not getting busy doing nothing. Just because you're creating activity doesn't necessarily mean it's fruitful.”
— Brian Preston [28:51]

This episode provides a comprehensive guide to optimizing your 401(k) strategy, emphasizing the need for personalized approaches and informed decision-making to achieve financial independence and a fulfilling life.

Notable Quotes:

• Bo Hanson [01:13]:
  “Even if you choose to do Roth contributions, you would still get the match. It’s just that the match goes in your pre-tax bucket.”

• Brian Preston [02:45]:
  “Every dollar that comes into your command and control has the opportunity for a 31-year-old to multiply 20.39 times by the time you retire.”

• Bo Hanson [06:24]:
  “It depends on your unique account structure, your unique goals, when you think you’re going to access these dollars, your unique risk tolerance capacity...”

• Brian Preston [13:05]:
  “The typical American does not understand the difference between use assets and investment assets.”

• Brian Preston [21:22]:
  “Use a charitable gift fund to stack your charitable contributions... you can set up automatic distributions to spread out your giving over time.”

• Brian Preston [28:51]:
  “Make sure the actions you're doing are not getting busy doing nothing. Just because you're creating activity doesn't necessarily mean it's fruitful.”

This comprehensive summary encapsulates the key discussions and expert advice shared in the Money Guy Show's episode on maximizing 401(k) strategies, offering valuable insights for listeners aiming to enhance their retirement savings and overall financial health.