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Finance: What is a 401(k)? 51 Views


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Description:

What is a 401(k)? A 401(k) is a retirement plan that is offered by many employers (government entities, however, use a 403(b) plan). These plans use money contributed by both the company and the employee to invest in their own stock and/or the stock of other companies for the benefit of employee retirement.

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Transcript

00:00

Finance a la shmoop... what is a 401k plan? okay say it with me tax deferred savings

00:11

that's it it's really not all that complex for the fancy numbers there all [Complex formula scribbles]

00:16

right well when you make money at work you get to defer the tax that you'll pay

00:21

on your income or earnings to be paid much later in life and you get to invest

00:28

that dough and let it ride tax-free until you take it out of your 401k plan [Money coming out of deferred savings piggy bank]

00:34

brokerage account and then at that point well you'll pay ordinary income tax on

00:38

your gains well the 401k was a part of the tax code

00:42

that was put into motion in the 1980s as the government began to painfully

00:46

realize that Social Security wasn't all that secure and that a whole generation

00:51

of people who had paid money into Social Security wouldn't get anything back so [People protesting outside the white house]

00:57

the government opened the door and made it easy or at least easier for the semi

01:02

wealthier masses to save money for their retirement and this was a new idea at

01:08

the time a whole new concept like a flying car before then it was mama [Man talking and flying car goes by a window]

01:11

corporation who managed the pension money for her employees you know that

01:16

sucking off the corporate teat and all that stuff well it fostered a sense of

01:20

long-term lifetime loyalty to the company and was all just very you know

01:26

IBM like a born in pinstriped blue diapers IBM employee with a hard loyal [Baby boy playing with a flashing rattle]

01:32

workforce working away there toiling in the IBM salt mines for 35 years

01:38

then retiring at 60 and having smoked a lot dying at age 65 and then that was

01:43

all she wrote well that was then this is now it's a different era different

01:47

financial pressures so companies don't generally offer pensions today and they

01:51

don't generally manage them themselves because the cost of buying real talent

01:56

like people who consistently beat the stock market in good times and

02:00

bad managing that 401k money is astronomically expensive and generally [Boxing gloves punching the stock market]

02:05

speaking corporations can't afford to pay those people nine times whatever

02:09

the CEO makes so companies generally contribute some amount of money to a

02:13

401k and then they leave it up to the employees to figure out how they want to

02:18

invest their retirement savings on their own and that's a good thing most of the

02:22

time and you know hopefully it's there when they want to go take it out and

02:25

they need the money when they're old and decrepit like like I'm getting...

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