Ep 74 | Your 401(k) Explained: Max vs Match

In this episode, Priya strips the 401k back to first principles - what it actually is, how the employer match works, and when maxing it out might be the wrong call. The catalyst: a smart, well-educated client who went years without contributing because nobody ever explained what "match" meant. Priya fixes that, then goes further - covering the traditional vs. Roth decision, why flexibility beats tax optimization, and the one rule that is genuinely non-negotiable no matter what else is going on in your financial life.

Takeaways:

• A 401k is not an investment - it is a tax-advantaged container. The investments you put inside it are an entirely separate decision.

• Your employer match is the only guaranteed 100% return available to anyone.

• If you are in your 30s building toward near-term goals - a home, a career change, a sabbatical - maxing your 401k might actually mean over-allocating to retirement at the expense of everything else.

• Most people who try to perfectly optimize the traditional vs. Roth decision end up with regrets about optionality.

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The Stuff Our Lawyers Want Us to Say:

Stash Wealth is a Registered Investment Advisor. Content presented is for informational and educational purposes only and is not intended to make an offer or solicitation for any specific securities product, service, or strategy. Consult with a qualified investment adviser (that's us) before implementing any strategy. Investing involves risk, including the loss of principal. Past performance does not guarantee future results. There…we said it.

Transcription

And this is where most financial advice completely falls apart. It jumps straight to "max it out" without asking, what else do you want? I'm gonna say something that may sound a little counterintuitive. If you are early in your career, building your life, saving for other financial goals, then maxing your 401(k) might not actually be the best use of every extra dollar.

Who the hell am I to tell you what to do with your money? My name is Priya Malani, currently managing millions of hardworking dollars. Enough foreplay. Let's talk money. Welcome to The F Word: Smart Money, No Bull.

Hey guys, welcome to The F Word. Lately, a lot of my episodes have veered towards money mindset work and behavioral changes that will help you master your money in your 30s. I love talking about this stuff because I believe that thinking differently about your money sets you up with a disproportionate advantage when you're a high earner.

But today, I'm going in a different direction. We're going back to the fundamentals, specifically your 401(k). And the reason I wanted to do this episode is because I was on a call the other day talking to a very smart guy. He had served in the Army, was well-educated, and he told me that for years he didn't contribute to his retirement account because he didn't understand what "match" meant.

And I had this moment of, okay, we've overcomplicated this, and it's true. I did a little Googling and most retirement 101 content isn't actually 101. It assumes you already know the basics. So today, I'm stripping it all the way back. What a 401(k) actually is, how it works, and how to think about it in a way that actually makes sense for your life.

Let's get into it. I'm gonna start with what it's not, so that you can reorient yourself around the actual definition without preconceived notions or assumptions of what you thought. A 401(k) is not a type of investment. A 401(k) is simply an account. Think of it like a container, and the purpose of that container, super simple.

It gives you tax advantages when you save within it for retirement. That's it. Inside that account, you still have to choose investments, mutual funds, stocks (not my favorite), ETFs, whatever your plan offers, maybe a target date fund. But the 401(k) itself, it is just the wrapper.

So why does it exist? The government, believe it or not, even though this is actually offered through your employer, wants you to save for retirement because if you don't, that becomes a much bigger problem for them later.

So they created accounts like 401(k)s and said, "If you use this account in the way it's intended, meaning that you leave the money invested for the long term, we will give you a tax advantage for doing that." The details of that trade-off are outlined in our tax code in Section 401(k). Now, let's talk about that part that tripped up my friend on the phone call, the employer match.

And good news, this is a once-you-see-it, you-can't-unsee-it moment. If your employer offers a match, it simply means for every dollar you contribute, they will contribute some amount, too. It's always defined upfront. To keep it simple, we're gonna say that your employer matches 100% of your contribution.

That's not uncommon for at least a portion of your contribution. So here's the example. You contribute $5,000, your employer will contribute $5,000, too. Now, you have $10,000 in your account. So what does it mean to contribute? It means you opt to allow some of your paycheck to go directly into your 401(k) versus coming to you in the form of your direct deposit.

Now, if your employer does this, if they match, you wanna make sure that you've opted in to maximize the match. You contribute as much as needed to get as much as they are willing to match. The reason this is so critical, and there's so much talk about this online, is because that is literally a 100% return on your money.

Now, that money they're giving you, that is not investing. They are not putting it into an investment for you unless you've selected that. We'll get to that in a minute. This is literally them just handing you money, only in a way that you can't touch it for a very long time. But that's a good thing because by them giving it to you, it means you've now saved more for retirement.

And theoretically, the more of their money that's in your retirement is the less money you have to contribute over the course of your lifetime, which frees you to do other things with your money, like travel, buy a home, start a family, take a sabbatical, upgrade your lifestyle. You get it. So to reiterate, there is nothing in the market that guarantees 100% return on your money.

Nothing. So the rule here is simple. If your company offers a match, you contribute at least enough to get that full match. That's step one. Now, if you're contributing but you aren't sure you're getting the full match — homework.

Okay, now let's talk about this big tax benefit. This is the second big piece, and it can get a little confusing. For most people, the default 401(k) option that they're offered is called a traditional 401(k). You might also hear it referred to as a pre-tax 401(k). What that means is simple. You're contributing money before taxes are taken out. So if you make $200,000 and you contribute $20,000 to your traditional 401(k), you will now be taxed as if you only made $180,000.

So what happens to that 20,000 that you contributed? It gets invested and grows over time. You have to actually select investments, but you don't pay taxes while they're growing. You will pay taxes later when you take that money out for use in retirement. The thinking behind utilizing a traditional 401(k) is that you're a high earner and you're likely in a high tax bracket today.

You may be in a lower one later, or at least, this is the part I really like to emphasize, you will potentially have more control about how your income shows up later and what tax bracket it hits. So that could be a good reason to defer taxes until later. Quick side note, if this feels too basic, I go much deeper on this in episode 54 with a CPA and episode 62, where I walk through retirement tax strategies, including why you should be thoughtful before doing things like a backdoor Roth conversion.

Real quick, if you've ever seen your paycheck hit your checking account and thought, "Where the hell does it all go?" You're not alone. If you're in your 30s making six figures, it's time to get your financial shit together. Go to stashwealth.com and book a call. All right, back to the episode.

Speaking of Roth, next up, the Roth 401(k). In recent years, this option has become much more common as more and more employers have started to offer it. So what is it? A Roth 401(k) is the opposite of a traditional 401(k) when it comes to taxes. You contribute money after your income has already been taxed. So using that same example, you earn $200,000 a year, you pay taxes on that full 200,000, and then from what's left, you contribute a portion to your Roth 401(k).

The money goes in after tax. It grows tax-free, and you don't pay taxes when you take it out in retirement. Some people confuse that with thinking that money is tax-free. Refer to episode 62 to learn a little bit more about why that isn't true. When thinking about a traditional versus a Roth 401(k), one thing I wanna make really clear is this is not about which one is better.

It's about when do you wanna pay taxes, now or later? I also want to say there's a lot of noise out there about trying to minimize your lifetime tax burden. I want to emphasize that you will get much further ahead, like grow a much fatter retirement, by simply getting started rather than trying to perfectly optimize this decision.

Now, because this is a 101 episode, my suggestion is to keep it simple and split your contributions down the middle if you're offered both a traditional and a Roth 401(k). So if you're putting away 10% for retirement, 5% goes into the traditional 401(k) and 5% goes into the Roth. Now, I'm not saying that's the perfect answer for everyone, but it builds flexibility.

Most people who try to find the perfect answer over-optimize taxes early and actually regret not having optionality on the backside. Flexibility is what matters here because when you go from HENRY, high earner not rich yet, to actually wealthy, you're gonna want options. And that includes having some of your money show up as taxable income, believe it or not.

And just one other quick note, taxes are one piece of this decision, but they're not the only piece. Because when you're thinking about where to allocate your money, you also want to consider everything else you're building towards, not just retirement. Now, let's talk about why contributing to a 401(k) actually matters in the first place.

What are you really doing here? Because this is where behavior meets math. When you contribute to a 401(k), you're essentially doing two things. You're saving money and you're locking that money away for a very long time. And that second piece is important because once money goes into your 401(k), you generally cannot access it without penalty until you're 59 and a half.

So this is not flexible money. This is long-term money. Why am I emphasizing this? Why does that matter for you? If you're in your 30s, you may want to buy a home. You may want to start a business, take time off, change careers. And none of those things are going to be funded by your 401(k). And while we're here, one more — your wedding. Absolutely not funded by your 401(k).

Okay, so now the question everyone actually wants answered. How much should you contribute? The answer, it depends. But I'm going to make it as simple as possible. So step one, get the full match, non-negotiable. Step two, decide based on your life. And this is where most financial advice completely falls apart.

It jumps straight to "max it out" without asking, "What else do you want?" I'm gonna say something that may sound a little counterintuitive. If you are early in your career, building your life, saving for other financial goals, then maxing your 401(k) might not actually be the best use of every extra dollar. On paper it looks like the right move, but in reality it can be over-allocating to retirement.

So tell your dad to cool it with the guilt trip if you aren't maxing your 401(k). You really wanna be intentional with your retirement savings, but also your pre-retirement savings. That's not what this episode is about. I have other episodes that get deep into the importance of intentionality and goal-setting and getting on the same page as your partner, if you have one.

But those are all reasons why the question of how much should I contribute to my 401(k) is not so easy to answer. At some point you will want a more comprehensive framework. Your 401(k) is just one piece of your overall financial strategy, but your money has multiple jobs, right? It's funding your retirement, as we've discussed, but your midterm goals, things that you may wanna do in the next 5 to 10 to 15 years.

Not that you have to have your entire life planned out, but your money's also funding your lifestyle today, right? And it's about balance, not about shoving away as much for the future as possible. You wanna use your money in a way that supports your life now, but also in the future.

Okay. Before I let you go, we always end the show with a segment called Best Bite. I'm a big foodie and I love to share something that I've had recently that just blew me away. And I have recently discovered a small dumpling mecca, I'm gonna call it, in the middle of Greenwich Village called Lin & Daughters. The dumplings are by far some of the best I've ever had, and yes, I've been to Din Tai Fung.

It was hard to pick, but my best bite was their cumin and beef dumplings. There is not much to say other than they were out of this world.

All right. So what do I want you to take away from this episode? Your 401(k) is not complicated. It's just a tool, a really good one, but still it is just a tool to help you accomplish your financial goals. And if you remember nothing else, make sure you're getting the full match.

If you found this episode helpful, please share it in your group chat to get everyone taking advantage of what's available to them, all that free money. This way you all age well-thy together. As always, if you have a sec to leave us a review, that's the best way to help other people find the show. And if you haven't already, please like, follow and subscribe so you don't miss future episodes. Thanks for listening. I'll see you next time.

Thanks for listening to The F Word with Priya Malani. If you like what you heard, hit subscribe wherever you're listening, and leave us a review while you're at it. We're approval junkies. Don't forget, you can find a ton of great resources, content, courses, and other freebies at stashwealth.com. Now, for the capital S stuff our lawyers want us to say.

THE STUFF OUR LAWYERS WANT US TO SAY: Stash Wealth is a Registered Investment Advisor. Content presented is for informational and educational purposes only and is not intended to make an offer or solicitation for any specific securities product, service, or strategy. Consult with a qualified investment adviser (that's us) before implementing any strategy. Investing involves risk, including the loss of principal. Past performance does not guarantee future results. There…we said it.