Your tax return is in no way that simple. I don't care who you are or what economic situation you're
in. If you have the knowledge about how it works, you can
utilize the tax code to benefit you more in the long run. It's kind of something that you learn about when
you get your dental package and your medical, you know, you're like, Here's your medical, here's
your dental, here's your 401k, here's your cubicle. Be great. The IRA has all the tax advantages of the planet work and
you fund it yourself. Here's everything you need to know about taxes 401. K plans and IRAs. Across the nation, Americans dig way down deep for our
record breaking income tax collection. It's hard to relax with those tax forms on your mind. But don't give up. That is easier said than done. Filing taxes seems almost painful by design here in the US. If you look at the many, many. Lines on the tax code, the just plethora of forms and
additional attachments that you may have to make, it's an incredibly
complicated code. It's over 7 million words long. The IRS estimates the average taxpayer spends 12 hours
working on it and ends up paying an average of $230 to get their paperwork filed. Your tax return is in no way that simple. I don't care who you are or what economic situation you're
in. Now, for some of us, it is the largest single financial
transaction that we make each and every year. Just take my case. I work for a company that's based in New Jersey, but I live
in New York and in Manhattan specifically. So I have to pay federal income tax, state income tax for
both New Jersey and New York, plus the city income tax from
Manhattan. That is a whole lot of paperwork. But tax experts say that all those forms and schedules are
actually designed to help us save money. If the filer knows how to navigate the tax code. We have 70,000 pages of rules and we have a deduction or a
credit for everything under the sun. If you have the knowledge about how it works, you can
utilize the tax code to benefit you more in the long run. However, most people don't have that knowledge,
and I think that is what creates this fear of the IRS and paying taxes when essentially the tax code is not there to harm anyone. So how did the tax code get to be so complicated and is it
really a good thing for the taxpayer? When I get my paycheck every other week, I get a line by line
list of all the money that's automatically being taken out, including what's being
withheld for federal, state and city income tax. Which begs the question, what exactly am I doing when I
file my taxes every year? If all this tax has already been taken out of my pay. The process that we. Go through every spring is to reconcile what we owe
according to the tax code with what we've already paid. In. Through withholding, usually for most people. But it's a complex process because there's oftentimes a
mismatch between. What we've already paid in and what it is that we owe. Instead of handing out direct checks to people who need
help, Congress runs a large number of social policies and benefits through the tax code itself. That means that theoretically, you can substantially reduce
the amount of tax you have to pay by claiming certain deductions, credits and expenses on
your tax return. We have a lot more freedom here where the tax codes are up
to you to utilize to your favor. On the IRS website, they explicitly state that you can use
the code to benefit you as much as you can. You have a full year to thoroughly and effectively tax plan
to make sure that your money is being spent in places where you are growing
it but at the same time reducing your tax liability. Some argue that having to itemize and identify all these one
off deductions is an unnecessary hassle, while others think it's key to leveling
the playing field. The price of unfairness is simplicity. When people talk about the flat tax or just do the one rate
tax, you know, that may be great for somebody, but somebody with three children
who's unmarried, who needs the earned income credit and the child tax credit and the dependent
care credit, those are complicated. You know, the person over here with just one
W-2, they may like the flat tax, but this other person, they need that. But tax breaks and deductions aren't the only reason that
filing your returns every year is super complicated. The tax system in the US is incredibly complex for a number
of different reasons. We tax households. Instead of individuals. Another common thing that comes up is that many people have
more than one job. And so again, unless you've made adjustments, your second
job, let's say you have a side gig, the withholding is not being done as if that's
your second job. It may be being done as if it's your first job. And in a system with graduated rates, that withholding may
not be. Correct the way people earn money. Also not always totally straightforward. The reason why the US tax system can seem complex is because individuals can earn income through different type
of ways. We can earn portfolio income, which is going to be income
earned through trading stocks and bonds. We can earn income passively, which can be created
through things like real estate investing, and then we can also have our
income from what we earn. The tax system can seem complex if you have income in
these different categories. And then there's politics. Remember, income tax goes back to the 16th Amendment in
1913. And since then, a whole lot of presidents have rolled out
their own changes and overhauls to the tax code. Additionally, every time a new president is signed on, they
have a tax reform policy that they're going to put into place. But it's not like they can always totally erase what came
before them. Instead, politicians tend to layer on top of what's already
there something. That provides political rewards for members of Congress. If you can help out some economic sector say that's
important in your district or state, that is a could be a political benefit
that redounds to you. And so there's a lot of incentive for Congress to add more
tax breaks. Experts say that this is part of why the tax code keeps
getting longer with all of these increasingly complex provisions that don't appear to have
any sort of overall logic. The first reason why our taxes are so complicated is because
they never seem to go away, even though we all want tax simplification. Nowadays, figuring out which forms and schedules you need to
fill out isn't exactly the easiest thing to do by hand. I could do my taxes by hand, but it would be very difficult
to do. That, and hardly anyone does that anymore. Do you want to be your own accountant? Are you going to take time and research the tax code? Are you going to take the time and research tax credits to
most people? They do not want to do that. This kind of attitude has been great for companies in the
nearly $11 billion business of tax preparation services. H&r BLOCK, TurboTax and Jackson Hewitt are some of the
biggest players in the tax prep software space. Our role is really to help all taxpayers understand the tax
laws and apply them to themselves so they can pay the minimum
amount of tax burden that they owe. I don't care who you are or what economic situation you're
in. High, medium, low. No income unemployed. You've got a complicated tax profile because low income
taxpayers qualify for a variety of tax benefits, high income people, a variety of
tax breaks and other benefits. People in the middle, they're in the phase out. They may qualify or they may not qualify. But hiring help, whether it's an accountant or tax prep
software, doesn't always come cheap. Every year, taxpayers spend more than $200 on average to
prepare and file their taxes. And remember, that's on top of anything they may owe the
government. Turbotax, which is owned by Intuit, made over $3.1 billion
from its consumer tax segment and fiscal year 2020, up 25% from two
years earlier. But there is one major headwind to this fast
growing for profit tax prep sector the rise of no fee online tax prep. Now for years, Turbotax's parent company has warned that
free government run tax services could pose a big threat to its business model. More than 20 states offer their own freemium filing portals
to allow residents to prepare and file state income taxes online at no cost. And 70% of Americans are eligible to file their federal
taxes for free online through IRS. Free File a public private partnership between the IRS and
a coalition of tax prep companies called the Free File Alliance, which
actually includes TurboTax. So about 100 million people could be filing their taxes for
free. The program got its start in 2003, but a fraction of those
eligible actually use it in 2020. Only 4.2 million of the 100 plus million eligible
taxpayers obtained a free return filing through the program. That was a nearly 50% increase from the previous year, but
still a small fraction of the total eligible taxpaying population. The Treasury Inspector General for Tax Administration
released an audit in 2020 to understand why so few taxpayers actually use the Free File
program. This report estimates that more than 14 million taxpayers
in processing year 2019 ended up paying for tax prep software that they could
have gotten for free. So why are so few people actually taking advantage of this
freemium model? The audit blames the complexity of the program a confusing
design, a lack of taxpayer awareness, and inadequate oversight by the IRS. Looking abroad. The process is even simpler in places like
Belgium, Spain and Denmark, where all residents have to do is check the
government's math on their pre-populated returns. I have graduate students from some European countries who
literally check over their tax forms on their cell phones and say, yes, yes, yes, adjust this. Okay, done. This YouTube video was posted by a taxpayer in Estonia. He walks us through the entire process of filing his income
tax return. It is utterly captivating, if not totally baffling. It takes him all of 2 minutes and 50 seconds. So can we take any of these best practices from abroad in
order to make paying taxes in the US easier? I mean, after President Trump's tax overhaul in 2017, now
more than 87% of taxpayers just take the standard deduction instead
of itemizing their returns. And for a whole lot of taxpayers, the government
already knows your income because your employer sends your W-2 and 1099 to the IRS. So that means that on both the income and deduction side of
things, the calculations are pretty straightforward. There have been proposals over time for the United States,
the IRS, for example, to mail out draft returns to taxpayers who are in straightforward situations. The idea being if you just have income, you know, earned
income from a job, maybe some interest income from a bank, straightforward tax situation, the IRS
could actually fill. Out their form for you. And you could check it over, make some adjustments if
needed, and then send it back in. It's that's what's done in a number of other countries. So remember Free File, that program where Intuit and other
for profit companies teamed up with the IRS to offer free filing? Well, that partnership had one big catch. The IRS for almost 20 years promised not to offer a rival
product that is up until it stopped making that promise in 2020
amid political and media backlash. But industry heavyweights like Jackson Hewitt say that tax
reform and simplification would be welcome news. Tax simplification is always welcome. I've often debated this with academics and philosophers and
say, Oh, you're in the tax business. You push tax complexity, you all are. For a more complicated tax system. Nothing could be further from the truth for any real tax
professional. You know, we like simple taxes that we can help taxpayers
administer. They'll always be tax business. $33.1 trillion. That's how much Americans have saved up for retirement. As of September 2020, about six and one half trillion of
that is held in 401 k accounts, representing nearly one fifth of the US
retirement market. For one case are an employer sponsored retirement plan, and
it's part of what we call one part of the three legged stool of
the US retirement system. The other two parts being Social Security and private
savings. Since 1984, one K plans have quickly grown to become one of
the most popular forms of retirement plans for US workers. It's frequently recommended, easy to apply for and easy to
keep track of, however. A recent survey shows that nearly two thirds of
Americans don't exactly understand how a 401 k works. It's kind of something that you learn about when you get
your dental package and your medical, you know, you're like, Here's your medical, here's your
dental, here's your 401k, here's your cubicle. Be great. And I think, you know, that doesn't let you know
how serious this is, especially now that retirement is very much in our own hands. So how have 41k plans become such a popular form of
retirement savings, and how should they be utilized to better prepare for
retirement? Until the 1980s. Most Americans plan for retirement through pensions. These were defined benefit plans where employers calculated
the employees retirement benefits or lifetime annuity based on their years of service and
final salary. The risk is all on the employer or the pension fund. The employer has to figure out how many years on average,
the people in the pension fund are going to live and has to tie the benefit to projected earnings. So there's a lot of risk on the employer or on the pension
fund if it's a multiemployer fund. That changed when Congress passed the tax code with the
Revenue Act of 1978. The act included a new provision in the Internal Revenue
Code, Section 401k that gave employees a tax advantaged way to defer compensations
from bonuses or stock options. Ted Benna, a benefits consultant and the so called
father of the 401k devise, the first 401 k retirement plan for his
clients. So what happened was, in the fall of 1980, I was helping the
Philadelphia area bank redesign the retirement program. And in the process of what they were trying to accomplish,
I was drawn back to this section of law which I knew existed. And interestingly enough, the bank turned it down because
their attorney didn't want them pioneering. So the first plan we did was in our own little
consulting company, beginning in January one of 1981, our employees
were allowed to put money in pretax and get a match from our
company. That's what's got this thing launched. Unlike traditional pensions that were defined benefit for
one case were defined contribution plans. Employers would create a retirement plan in which their
employees could contribute a portion of their wages on a pretax basis, up to an amount determined by the
IRS. So we went from a system where the employer in the private
sector paid for the entire pension and took on all the risk to a system where the worker in the
private sector took on most of the cost and all of the risk. Now, in most for one K plans, employers also offer to match
the employees contributions most commonly $0.50 for every dollar saved
and up to 6% of the employee's pay. It's basically free money. Your company is saying, Hey, if you contribute to the 401. K, we're going to contribute money on your behalf, too. So if you put in 4% and your company manages 4%, you have
8% going towards your goals and only 4% was out of your pocket. So it's a win win. For one K and other defined contribution plans like it
quickly replace traditional pension plans. From 1980 through 2000, eight participants
in pension plans fell from 38% to 20% of the US workforce, while employees
covered by defined contribution plans jump from 8% to 31%, according to the Bureau of Labor Statistics in 2020,
about 60 million American workers were participants in a 401 k with
about 600,000 401k plans within a decade. The majority of workers overall were in a 401 k rather than a traditional pension. So the switch from a
traditional pension to a401k happened very, very rapidly. The employer friendly nature of the 401k might also have
played a big role and the rapid shift from traditional pensions 41k plans can often be
offered at a minimal cost compared to pensions. It can save companies on small business taxes and also
provide a competitive edge in the talent market. If the company wants to be benevolent or a little bit more
paternalistic. There's been some research that shows that offering some of
these benefits or taking away some of the stress related to retirement, that helps increase workers productivity. So that might be one of the reasons, but I think the
biggest reason is probably to be competitive among among the workforce. Typically 41k plans can be invested in four ways employer
stocks, individual stocks, mutual funds, or exchange traded funds
that invest in a variety of companies and sectors. Mutual funds still remain the most popular option,
accounting for 62% of 401k plan assets as of September 2020. With a mutual fund, you're able to buy shares daily. What made them very appealing to 401k plans because for one
K money is being created every day to be invested. And so it needs someplace where it can be invested in an
intelligent manner. And shares bought every day and sold every day. Saving alone for retirement, is not it? It's not going to get you to your goals. So we want to be invested in the market. A lot of people don't feel comfortable in doing so and then
they also want to be diversified. So that kind of hits all of the targets. It turned the mutual fund industry into what it is today. You know, the mutual fund business was a small mom and pop
type operation for 401k came along. It's been incredible what it's done in that regard. For one case also come in a different form known as Roth for
one case where contributions are made with after tax dollars rather than pretax dollars. The consensus among experts on which is better is that it
depends entirely on the contributor. It depends on what you think your future or tax liability is
going to be. And that can be kind of hard to predict if you think you're
going to be on a high wage growth trajectory and you're young right now, then maybe a
Roth is is better because you might face higher taxes in the future than you do now. So the younger you are, the more I would contribute to a
Roth. The older you are, the more I would contribute to it. What's called a pretax account or a traditional IRA just
depends on which one you're using. Age, along with risk tolerance, also plays a vital role in
how you allocate your funds. There are funds like target date funds that help you
automatically do that, especially for people who are not really familiar in how to allocate and balance
their investments. And so that helps take some of the uncertainty out of it. The recent COVID pandemic has left a profound impact on the
American economy, but surprisingly, its effect on for one case, it hasn't been too severe. What we're seeing now. The stock market hasn't plummeted. We haven't seen any decline in asset values. There are obviously some health risks, but financially,
upper middle class and wealthy people are doing well during the COVID recession. According to a 2018 report from Pew Research Center. About 29% of American adults live in lower income
households, 52% in middle income, and just 19% in upper income,
according to sociologists. Only 15 to 20% of the entire working age population is
classified as being an upper middle class. The people who were. More likely to be affected by COVID and the employment shock
tend to be lower earners younger, and they're also less likely to have access to
a41k or employer sponsored plan in the first place. So for those people, it also didn't affect their retirement
savings just because they didn't have any. To begin with. However, about 8% of employers have cut 401. K contributions in 2020 in order to pare back expenses amid
the coronavirus crisis. That equates to more than 51,000 plans, according
to federal data. Small businesses were the most likely to take such cost
cutting measures. The American Retirement Association tells us that they've
looked at the data and they they assume they are expecting more than 200,000 small business retirement plans are at risk of termination. Now, CVC has already reported companies like Amtrak,
HAVERTY Furniture companies, La-Z-Boy, Marriott International. Those are just some of the companies that are suspending,
reducing or delaying their matching contributions to employees for one day plans. Many others are considering it. If there's any good news, it's a 4 to 1 case have
historically fared pretty well during times of recession. Despite the ups and downs in the market,
research shows that the average account balance of 41k participants who made consistent contributions from
2010 to 2018 saw a compound annual average growth of 13.9% over that
time period. Retirement savings is a is a long run investment, and it's
important not to panic during these dips because stocks do tend to
outperform other assets in the long run. It could possibly take a hard hit. If you're 80 or 90% invested in the stock and based on your
age, you should be. That can happen. But you have to kind of find reassurance to know that, hey,
trouble doesn't last always. And at some point over time, as the stock market
will increase and rebound and you'll put yourself in a better
position. Months of economic uncertainty have also driven some people
to tap into their retirement savings. The CARES Act, passed in 2020, sought to help
workers suffering from the pandemic by allowing individuals to withdraw up to 100,000 from
eligible retirement plans without the 10% early withdrawal penalty applying. One thing that many retirement experts were very nervous
about was that during this pandemic, we've made it easier to withdraw money or take money out
of. For one case, there was some fear that there would be a lot
of people taking money out. I mean, we've seen some, but not as much as anticipated. And frankly, the reason is that most of the people who are
losing their jobs in this pandemic had very little or nothing in these accounts. Around half of private sector workers aren't covered by an
employer sponsored retirement plan either because they aren't eligible or because they don't have one
offered to them. This includes a growing number of American workers who are
contractors or self-employed. If you work for a small employer, they are probably not
going to be offering a plan. A lot of companies have ten year requirements and then a
lot of companies don't give access to plans to part time workers. I think at any given time, about half of the
workforce doesn't have they're not participating in a plan. States like California, Illinois and Oregon have begun
combatting this issue by automatically enrolling private sector workers who lack access to an
employer sponsored plan in December of 2019. Congress also passed the Secure Act that allows
small businesses to work together to offer 41k plans called multiple employer plans
or MEP's estimates say the Secure Act could lead to the
creation of 600000 to 700000 new retirement accounts. Despite these efforts, there is still a lot more work to be
done. In terms of people who work for a company that offers a plan
and they actually qualify to join. They see that the opt out rate isn't super high. The bigger problem, I think, is people without access. Even if you're a good worker and you have your own company
setup, you can set up your own retirement plan. You have the option of a solo 401. K, which acts just like a regular for one K through a
regular plan. Or you can do a SEP IRA. So there's a lot of different things that are available for
entrepreneurs that I just don't think a lot of people know about. So I think that's really that education, that financial
literacy disconnect is really the problem, not the actual form one K itself. Are you one of the 60 million Americans actively using a41k
plan to save for retirement? How do you know that's the right choice for
you? Despite their immense popularity, 401 k plans aren't the
standard for all retirement accounts. Iras or individual retirement accounts are the
most popular choice for those saving for retirement, accounting for more than a third of
all U.S. retirement assets. The IRA provides a lot of autonomy and opportunity to invest
in things that you feel are fit or work better for you. First introduced in 1974, IRAs have seen explosive growth
over the last five decades. Individual retirement accounts totaled an estimated $12.6
trillion in assets during the first quarter of 2021, compared to just
$2.6 trillion back in 2000. In our research, we've been able to see that the people who
use the IRA to make contributions do so year over, year over year. But an IRA isn't the only account that future retirees
should look out for. More and more Americans have been taking advantage of their
HSA or health savings account to supplement their retirement savings, despite the
fact that the account was never intended to be used for that purpose. Contributions similar to traditional for one k's or IRAs,
they go in pretax, but unlike traditional 41k and IRAs, they're also
not taxed upon withdrawal if you're using it for a qualified
medical expense. Choosing the right retirement account that best suits your
needs is a vital step in making sure you are well prepared for retirement. So how do these alternative retirement accounts operate,
and which retirement plan will be best for you? When it comes to choosing a retirement account that's best
for you. It all comes down to what financial situation you're
currently in. But most experts agree that employer sponsored accounts
should be utilized whenever possible. These include 401 K and four or three B plans,
which are retirement accounts dedicated specifically for employees of
public schools, employees of tax exempt organizations and certain ministers. When thinking about the first best place to save for
retirement, for most people that will actually be there for one K or for
a3b plan at work. And the reason is, nine out of ten participants are
in plans where the employer makes contributions. I think for one case are great because typically they have
lower fees than other retirement accounts. And especially if your company is offering a match, then
for one case are the way to go. Iras are best for self-employed individuals and employers or
employees who are not offered a 401 k due to its limited matching and
lower contribution limit in 2020 1401k plans had a contribution limit of
$19,500 a year for employees younger than 50, while IRA
contribution limits were strictly set at $6,000. That goes back to what they were originally designed for,
right? So the goal was to enable those without an employer
sponsored plan to save a tax deferred fashion. And typically people who are higher income working
for large companies, their company is going to offer a41k. So it struck the balance between allowing people to save
for retirement and offering them that tax advantage, while also making sure
that this isn't just a tax shelter for the very wealthy. You don't have a plan at work. The IRA has all the tax advantages of the plan at work and you fund it yourself. So it's your contributions that will go in. There won't be any employer money in a traditional or Roth. It'll be your contributions going in. But it's a great way for you to get those tax advantages
that the folks are getting in the employer sponsored plans. Meanwhile, financial advisors warn HSAs should only be used
to supplement your main retirement savings. Hsas should definitely not be a replacement for a41k or an
IRA. If you have a high deductible health insurance plan, then
HSAs are great for setting aside money in case of medical expense. To make the most of your retirement accounts. You first need to understand how all the different plans
work. So traditional IRAs were first introduced as a part of a
race back in 1974, and the goal was to really enable those without an
employer sponsored plan to save in a tax deferred way. And so, although eligibility initially was to those without
pensions, it eventually expanded to those with employer sponsored plans. In the 1980s. Iras were also designed to play another vital role in our
retirement market consolidation of rollovers. When people change jobs and they don't want to keep the
balance in their 41k with their old employer, then they'll transfer it over to an IRA
because that is attached to them directly. And rollovers have played a major role in fueling the growth
of IRAs in mid 2020. More than half of all traditional IRA owning
households had accounts. Containing some amount of rollovers from their previous
employment. If you think about all the folks who change jobs in any
given year or who are retiring and who want to consolidate that money into one spot, put
it into an IRA, a whole lot of the growth is because of those
rollovers coming into the IRA space. So it's sort of a place to park retirement assets as well
as a place to drive some real retirement saving. Ira holders enjoy a wide array of benefits that are unique
to their account. For instance, like the 401k. Most IRAs have a 10% penalty for any early withdrawal
before the age of 59 and a half. But IRAs can give an exception to certain expenses, such as
higher education, health insurance, if you are unemployed and up to $10,000 for a
first home purchase. But its biggest advantage over any other retirement account
is its wide selection of investment options. With the IRA, you have exposure to the public marketplace fully, so you can own ETFs, mutual funds, individual stocks. So I think that the popularity of the IRA is that it does offer a place to build a retirement nest egg that has
the tax advantages of a plan. Iras come in numerous different types, but the most popular
comes down to these for traditional Roth SEP and simple IRA, each one comes with its own set of rules. As the industry evolve and you have different types of
workers doing different types of things and that need different deferred vehicles. You've seen the Sep IRA created you seeing the simple IRA
period. So retirement industry has evolved quite a bit over the
last 25 years to kind of meet what the market demand is. Traditional IRAs are the oldest and most common type of
individual retirement account. In 2020, 36.8 million US households or 28.6% owned a traditional IRA. You can contribute cash and receive a tax deduction in
return if you qualify the money inside the account is tax deferred, meaning you can
delay paying taxes on the amount until later date. While there technically isn't an income limit for
contribution, how much deduction you are eligible for depends heavily on whether you are already
covered by a retirement plan at work. A full deduction is only allowed if you and your
spouse, if you're married, aren't covered by a retirement plan at work. If you or your spouse is covered, then your deduction
eligibility depends on how much income you make. If you're eligible for a deductible contribution, you can
save on your tax bill this year. Once the money is in that traditional IRA, it
compounds. So think of all those reinvested earnings and capital gains
all just getting plowed back into the account without any taxes. And then when you get to retirement and start taking the
money out, it gets counted as income because you're now finally taking that income
that you put aside and taking it out in retirement so you can live on it, and that's when you pay taxes on it. Roth IRAs are the second most frequently owned type of IRA,
held by 26.3 million US households or 20.5%. The major difference between the traditional and Roth is
when the owner is responsible for paying taxes on their contribution. The Roth IRA is a little bit different where you're taking
after tax money, it grows tax free. And then as long as you hold it for more than five years
and your retirement after 59 and a half, you can pull those assets
tax free. So if you think if you're young right now, you think that
you're going to be in a high wage trajectory. And so in the future, your your taxes are going
to be higher, then it might also be beneficial to have a Roth. Now, SEP and simple IRAs are two employer sponsored plans
reserved for small businesses and self-employed individuals. In 2020, 8.6 million or 6.7% of US households owned some sort of an employer sponsored IRA
plan. They were designed to allow small employers to provide
retirement account without having to deal with the administrative burden of providing a plan. But something simple IRAs are kind of in a different
category from Roth and traditional IRAs. They have different income limits and they have
requirements on employer size. The major difference between SEP and simple IRAs lies in who
can make the contributions for SEP IRAs. It's generally the employers who make the contributions for
themselves as well as their employees. But for simple IRAs, both the employer and the
employee can make the contributions. The employer, however, is generally required
to match the employee's contributions up to 3% of the employee's compensation, or
at least 1% for no more than two out of five years. The simple is restricted to small employers, so fewer than
100 participants. And the idea there was. That it would be easier for the employer to set up an IRA
for their workers rather than a full blown 401k plan. And so the employer makes contributions. It's an IRA. Individuals choose the investments within the
account, and it pretty much is like an employer sponsored plan, basically for
people. But in an IRA structure. There's a laundry list of different types suitable for every
financial situation. For instance, self-directed IRAs can include investments
such as real estate, private company shares, and even cryptocurrency. Ira is definitely, as you offer, a self-directed option once
you can add in real estate. And I'm sure a lot of people have heard the stories of some
multibillionaires who have, you know, a large amount of money in their IRAs
that could not have come from contributions alone. I think what's so important here is to do an assessment and
to really kind of understand what you need, this tool or what are you trying to solve
for, and then ultimately figure out what's the best plan that works for you. If you think about retirement savings plans such as for one
case and IRAs probably come to mind. But there are other unexpected ways of working
individual can save for retirement. A health savings account is one of them. I'm just as puzzled as you in terms of why HSA is became another option for retirement account. I don't think they were designed to be a retirement
account. First introduced in 2003 HSAs were originally created to
incentivize saving for medical expenses for those with a high
deductible plan. I think it's been borne out of folks with high premium
costs. Health insurance has gotten expensive. So I think you've seen a lot of participants move to these
high deductible plans that are a little bit cheaper. The idea is that you can put money pretax into HSA and set
that aside. So in the event that you need to spend money on your
health care, that would not be covered by your insurance plan. The ones that I've seen that have been most popular are for
folks that are getting close to retirement, let's say ten years out, that are planning for retirement, said, hey,
listen, I want to defer some assets for potential health care costs down the road and
then they retire. They get their Medicare or Medicaid or whatever it
might be, and they're part B, their supplementary plan. And then on top of it, they have an HSA plan that really
makes sure they take care of all their health care needs. What makes HSA such an effective tool for retirement isn't
just the tax deduction, but the fact that funds can be withdrawn at any time for health
expenses. However, once you've enrolled in Medicare, you can't
contribute to an HSA. You still have access to the funds already put aside, but
you can't add more. Unlike traditional for one kids and IRAs, they're also not
taxed upon withdrawal if you're using it for a qualified medical
expense. So the plus side is that you're kind of getting a lot of
tax benefits. The downside is it only works if you're using it for
medical expense. However, a majority of HSA holders are using their accounts
to cover their expenses rather than using it to save for retirement. Despite the fact that an HSA balance can also be used to
invest, just 7% of health savings accounts in 2019 held investments
other than cash. Think about this. I've deferred dollar for dollar 10,000
into my HSA over five years, and that 10,000 has been invested into a portfolio that is now grown to 15,000. You've had the capital appreciation of five grand because
your cost basis was ten. Now you have 15,000 available to you to take care of
medical expenses. So it's not a dollar for dollar. I think folks miss the investment component. That's a major deal. And being able to provide for health care expenses,
there's. Certainly a lot of different types of retirement accounts. It is important to understand the options, especially the
employer sponsored options you have available. Just because it's the best way to build up a nest egg for
retirement is to start saving early. The Biden administration is expected to propose several
changes to the current retirement plan options. During his campaign, President Biden called for an
overhaul of 401k tax breaks that tend to skew towards higher income
families by equalizing the tax benefits of retirement plans. He also proposed the creation of Automatic for one case
that would provide workers without a pension or a401k type plan a chance to easily
save for retirement at work. Despite these changes, retirement accounts will continue to
grow as more Americans realize the importance of saving for retirement. I think that really in looking at the US retirement system,
it's a system that is really accumulating. We've got $35 trillion earmarked for retirement and we are
going to continue contributing and building that system so that. People will have those nest eggs when they get to
retirement to rely on invest in you. Ready, set. Grow cnbc and acorns.
