Ep 009 – When Its Not a Good Idea to Use a 401k

Summary: What Is A 401(k)? When Was It Created? [0:03:00] What is a ROTH [0:10:27] Capital Gains Explained [0:13:44] Financial Advisors Can Help Maintain Your Accounts [0:16:16] When Is It Not A Good Idea To Do A 401(k) [0:25:44] Other Times To Not Use or Put Money In A 401(k) [0:33:27] What Can You Do With Your 401(k) [0:38:26]     Welcome to the Financial MD Show. This is the only podcast designed specifically for residents and young physicians to help you become educated on financial planning for physicians and avoid many of the common financial mistakes doctors make. Your hosts, Jon and Trevor, explore a different topic with each episode. Jon Solitro is a financial planner and certified financial education instructor. He’s been working with young physicians for the better part of the decade and lectures to graduate medical programs around the country. Dr. Trevor Smith is a board certified ophthalmologist with a full time practice and he has learned the ins and outs first-hand what it takes to make smart financial decisions as a young physician. And now here’s your hosts, Jon and Trevor.   Jon: Hey everybody and welcome to the tenth episode of the Financial MD Show. This is the number one stop for getting direct tips, education, and knowledge on how to make smart personal financial decisions as a resident, so thanks for joining us today. We’re excited because we’re going to give you a twist on a very commonly recommended topic – that being 401(k)s – and, specifically, when is it not a good idea to utilize your 401(k) at work. We’re going to talk a little bit about the history of 401(k)s, how they came about. Trevor is going to go a little bit into the ROTH concept when that makes sense versus a pre-tax contribution to a ROTH, and then we’re going to talk about some things to watch out for. What are the biggest drags on investment returns in a 401(k) or any other account for that matter? Make sure you’re taking notes, rewind if you have to. We’ll be sure to post plenty of resources in the show notes afterwards, but this is going to be a good one to give you some practical tips on when this makes sense and when it doesn’t.     Jon: Okay, so today, we are talking about when it’s not a good idea to use a 401(k) and we’ll make that a general statement so we can apply it to a lot of situations and it’s not so specific as we do in the advice world especially when we’re making a podcast. Full disclosure, I say it at the end, but this is not necessarily financial advice. You got a couple of financial nerds talking about different topics that pertain to doctors and that’s all we’re doing today. We’re going to keep it fairly general and this helps us to get a lot of traction out of this 45 to 50 minutes.   What Is A 401(k)? When Was It Created? [0:03:00]   So let’s talk about a 401(k) a little bit first because of two things. Most people don’t know what that is. They know it has something to do with employee benefits and/or they know it’s a retirement at an employer, but I get this question all the time – what’s the difference between a 401(k) and a 403(b)? And I was like, “Oh, nothing for all intents and purposes.” For our situation here – for you, as the investor – nothing. It’s a little different for what they call the plan sponsor which is a fancy name for the employer. In general, let’s talk about what a 401(k) is or a 403(b). It was created back in the 70s with the ERISA, the Employee Retirement Income Security Act. This created a lot of rules around employee benefits and especially rules around retirement. Back in the day, there were pensions. For years and years, you got a pension, which meant that the company would put away money for all their employees, typically into one big pool, and they had a record keeper that would kind of see how many credits different people had accumulated based on years of service and then how much they made, and then when they retired,