NerdWallet's Smart Money Podcast - 401(k) vs. Brokerage Account: Which Is Better for Retirement Savings? Plus, the National Debt Explained

Episode Date: April 3, 2025

Learn about the U.S. national debt and how it impacts economics and what options to explore if your employer-offered 401k plan seems limiting.  What exactly does it mean when you read about the enormous national debt in the United States? What options do you have if you’re not happy with the 401k plan offered by your employer? Hosts Sean Pyles and Elizabeth Ayoola dig into investing options with NerdWallet personal finance lead writer June Sham. But first, NerdWallet senior news writer Anna Helhoski joins the show to break down what exactly is the national debt, who does the U.S. owe, and why it matters to everyday Americans.  Next, Sean, Elizabeth and June answer a listener’s question about whether it’s worth it to invest in their employee-offered 401k plan even if it feels limiting. The Nerds explain the pros and cons of a 401k as well as alternative options to explore, including a brokerage account or an IRA, and why you don’t have to limit yourself to just one type of account.  NerdWallet’s list of best IRA accounts: https://www.nerdwallet.com/best/investing/ira-accounts Choose the best retirement plan: https://www.nerdwallet.com/article/investing/best-retirement-plans-for-you  In their conversation, the Nerds discuss: national debt, what is the national debt, how much is the US in debt, US debt ceiling explained, difference between debt and deficit, publicly held debt, intragovernmental debt, who owns the US debt, debt to GDP ratio, US debt crisis, what happens if the US defaults, national debt impact on economy, foreign holders of US debt, Congressional Budget Office debt projections, US budget deficit, treasury securities explained, debt ceiling vs national debt, federal spending and tax revenue, 401k vs brokerage account, should I invest in a 401k without a match, 401k managed by insurance company, 401k fees and disclosure rules, retirement investment options, Roth IRA vs 401k, traditional 401k benefits, taxable brokerage account vs 401k, 401k contribution limits 2025, early 401k withdrawal penalties, required minimum distributions 401k, investment fees and expense ratios, choosing a Roth IRA provider, best retirement account for long-term growth, retirement planning tips, comparing retirement accounts, 401k rollover options, best Roth IRA accounts 2025. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Confession time. How much debt are you carrying right now? If you don't want to share the details, can you at least confirm it's not trillions of dollars? Well, the U.S. government cannot say that. It's currently more than $36.2 trillion in the whole. And today, we're going to hear how that happened, how serious it is,

and what it means to our personal finances. -♪ it is and what it means to our personal finances. Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. Sean will join us in the later half of this episode where we're answering a listener's question about investing in their 401k accounts and whether it's cool that an insurance company is in charge of managing it. But first, our weekly Money News Roundup where we break down the latest in the world of finance to help you be smarter with your money.

Our news colleague, Anna Helhovski, is here to talk about the large financial hole the country is in and what it means for all of us. Hey Anna. Hey Elizabeth. We're going to be answering two listener questions today. And this first one is asking for a bit of an explainer. They wrote, Hi nerds, could you attempt to explain how we got into trillions of dollars of national debt? When was the last time we were in a surplus? Who exactly are we in debt to? Thanks.

So Ana, where do we even begin with this subject? It's really hard to wrap my brain around that figure I mentioned earlier, $36.2 trillion. How does the government rack up that kind of debt? It's kind of unbelievable, but let's start with what the national debt is, and then I'll explain how we got to where we are now. So the national debt is the sum total of all the money the United States government has borrowed, but has not yet repaid. Like you and me, the government earns and spends money.

But of course, its earning and spending is pretty different than ours. The majority of the federal government's earnings are made through tax revenue, and it spends money on programs and services for US citizens, and like most debts, it has to pay the interest too.

As you mentioned, the total national debt right now is $36.2 trillion, but that's the kind of number that is so enormous that it practically loses its meaning. It feels too big to comprehend. Exactly. And when you break down that number by how much money it owes per citizen, it's around $106,000. That's maybe a little bit easier to wrap your head around, but it's not the way that economists prefer to think about the national debt.

Instead, they compare the total debt against economic growth, also known as gross domestic product, to find out what the nation's ability to repay our debt is. In other words, our debt to GDP ratio. At the end of fiscal year 2024, the U.S. had a debt to GDP ratio of 123%, which means the debt we owe is roughly 123% of our annual growth. That is not where you want to be.

So how did the debt get to $36.2 trillion on them? So the national debt grows when the government spending and interest expenses grow faster than revenue can offset. Increased spending along with tax cuts have led to where we are now. Now going way back in US history, we've often seen national debt spikes during wars, the Revolutionary War, Civil War, World War I and World War II. In the last couple of decades, the government borrowed a significant amount during the Afghanistan

and Iraq wars, as well as the 2008 recession. And the national debt has risen every year over the last 10 years. There are two big reasons why we arrived at that $36.2 trillion amount. During the first Trump administration, we saw broad new tax cuts implemented, which meant that the federal government has been bringing in less tax revenue. And then spending increased significantly during the pandemic. From 2019 to 2021, spending increased 50%. So who owns the debt and what is the debt made of?

Its creditors own the debt. That includes the American public, foreign governments, other securities holders, and government agencies. The national debt is made up almost entirely of treasury securities. And there are two types. Marketable securities, so assets that can be bought and sold quickly, like bonds, bills, or company shares, and non-marketable securities. Financial securities that can't be easily sold, like U.S. savings bonds or shares of a private company.

Now, those securities fall into two categories, publicly held debt and intragovernmental debt. And then how do those shake out? Roughly 80% of the national debt is publicly held debt. That's any federal debt held by entities outside the federal government. The remaining 20% is intra-governmental debt, which is money that's essentially passed back and forth by government departments. As of now, the total outstanding national debt breaks down to $7.3 trillion in intergovernmental holdings and $28.9 trillion owned by the public.

Can you explain more about the difference between the two? Sure. So let's first break down publicly held debt. It's essentially money borrowed from outside lenders through financial markets. That includes the Federal Reserve System, mutual funds, state and local governments, depository institutions, pension funds, insurance companies, foreign countries and other domestic holders. You just mentioned foreign countries.

So which ones does the US borrow from the most? That'd be Japan at more than $1 trillion, followed by China and the UK. And some other large debt holders are Luxembourg, the Cayman Islands, Belgium and Canada. In recent decades, we've come to rely more on foreign lenders than we once did. Now what about intragovernmental debt? So this debt isn't a traditional debt in the way a public debt is. It's money that's shuffled around from one department to another in order to fund programs. But that money still needs to be tracked for the sake of accounting.

An example of an intragovernmental debt is the largest one, the Social Security Old Age and Survivors Insurance Trust Fund. And that's one of the funds that the Social Security Administration uses to pay benefit recipients. I think it's safe to assume that the national debt will grow, but what do economists' projections show? Earlier this year, the Congressional Budget Office projected that the national debt will increase by $23.9 trillion over the next 10 years.

It also forecast that the federal budget deficit in fiscal year 2025 is on pace to grow by $1.9 trillion. Anna, does the government ever pay off its debt? Uh, it doesn't really pay it off. It just manages the debt. And debt can be offset by revenue, so bringing in tax revenue and issuing Treasury securities. If people cash in enough Treasury securities that it exceeds the total number sold, that can bring down the debt too. Budget surpluses would also

reduce the debt, but the US hasn't had a surplus since the 90s during the Clinton administration. Can you tell me why national debt matters? It matters because it affects the economy at large. It also influences consumer, company, and investor behaviors, and it guides policy decisions. When the national debt is high, individuals and companies may lose confidence in the economy, and that can impact how they invest and spend. Declining confidence could also lead the Federal Reserve to increase interest rates or keep

them high, which makes it more difficult for people to borrow. It could ultimately lead to lower economic growth, which, as I explained earlier, will make it even harder to manage the national debt. And if the U.S. doesn't have the revenue it needs to offset more of the debt, then interest on the debt just grows, which could lead the U.S. to borrow more, increase taxes, or cut spending on programs that people and businesses rely on. It's basically a negatively reinforcing cycle. Well, I've seen the debt ceiling back into the news lately.

Can you explain how it's different from the national debt? They're related, but not the same. Again, the national debt is composed of money that's currently borrowed by the government plus interest on that debt. Meanwhile, the debt ceiling is the total the government can borrow in order to meet its legal obligations. That means funding for things like Social Security, Medicare, military salaries, tax refunds and interest on the national debt.

The debt ceiling, also known as the debt limit, is $36.1 trillion and we hit that ceiling back in January. But the Treasury is now taking quote, extraordinary measures to keep legal obligations funded. But we're hurtling toward potential calamity. The US is expected to run out of the money to meet its obligations as soon as late May. Now if we get to that point, the US could default on its debt. And default would be catastrophic. And if it went on long enough would plunge the US as well as the rest of the world into a financial crisis.

So Congress needs to act soon to avoid that default. I think we'll likely get deeper into this in a future episode. I'm pretty sure we will. Thanks, Anna. You got it, Elizabeth. Up next, Sean is back to help answer a listener's question about whether it's worth contributing to a 401k without an employer match and without a lot of investment options, or if it's better to do a brokerage account on their own.

But before we get into that, a reminder, listener, to send us your money questions. Leave us a voicemail or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. This episode's money question is coming up in a moment. Stay with us. We are back and answering your money questions to help you make smarter financial decisions.

This episode's question comes from Vicky, who left us a voicemail. Hi Sean, this is Vicky. I have a 401k eligible for my employer, but it's with an insurance company and they do not give a match. I read through the paperwork and the insurance company that it's through can change their pricing, their fees at any time and they don't even have to tell the customer about it. I'm not crazy about the fund that they offer, but I'm wondering if it's better to put money

into the 401k or just do a brokerage account on my own. Thanks a lot. To help us answer Vicky's question on this episode of the podcast, we are joined by investing nerd June Schemm. Welcome back to Smart Money, June. Thanks so much for having me again investing nerd, June Schemm. Welcome back to Smart Money, June. Thanks so much for having me again. Hey June. So I want to start by laying the groundwork for the conversation.

Our listener, Vicky, has a 401k that happens to be maintained by an insurance company investing in at all. like an investment company overseeing such an account? Yeah, it might be surprising, but 401k plans can be set up by different types of financial institutions, such as a bank, mutual fund provider, or as in our listeners case, an insurance company. Whether a 401k plan is managed by an insurance or investment company, their role is the same. They're responsible for the written plan,

which outlines the type of 401k plans offered, organizing a trust fund to hold the plan's assets, creating a record-keeping system, and providing plan information to participants. Vicki says that the insurance company can change the fees at any time without notifying the people who are actually in the plan. And to me, that doesn't sound right. What do you think is going on there? Because it's my understanding that retirement plans have specific disclosure requirements. Yes, they do. Retirement plans do have to share plan information, which includes expenses and fees. The IRS calls these participant plan and investment fee disclosures. They're shared at the beginning of the plan and then at least once a year after that.

You can also expect to receive quarterly statements that share information on how much was paid out from your account for certain fee. What can make it confusing is that retirement plans do have to update participants regularly, but it might not happen with every change. Our listener is considering not investing in their 401k at all, given that they don't get a match and they aren't wild about the investment options in the account. But there are still some serious advantages of investing for retirement in a 401k versus a regular taxable brokerage account. Can you lay those out for us? Yeah, it's unfortunate that our listener doesn't get an employer match for their 401k contribution, which is a really big perk for using a 401k to invest for retirement in the first place.

But another big reason to invest for retirement in a 401k plan compared to a brokerage account is the tax advantages. to invest for retirement in a 401k plan compared to a brokerage account is the tax advantages. If you have a traditional 401k plan, contributions are pre-tax, meaning you can lower your taxable income for the year by adding to your account, up to the IRS contribution limit. On top of that, any gains from investment earnings, dividends, and interest don't incur any taxes until you make withdrawals in retirement. If you want to defer the tax break until later, and it's available to you, you can consider a raw 401k plan. Contributions are made with after-tax dollars, so you don't get a tax break upfront,

but the money grows tax-free and comes out tax-free in retirement. With a brokerage account, you don't get a tax break for contributing, and you'll owe taxes on dividends, interest, and capital gains every year. So, June, it sounds like, as you laid out, there are many benefits of actually contributing to a 401k.

But can you think of any drawbacks of investing in a 401k for retirement versus a brokerage account? Yeah, there definitely can be drawbacks. And our listener has pointed out a few. Limited control over fees and investment options. Additionally, because a 401k is meant to be invested for long-term growth,

early withdrawals before retirement age may come out with taxes and penalties. If you really needed money, you could also explore a 401k loan, depending on your plan provider's rules. In comparison, you get to do your own research and choose your own brokerage account provider. And if needed, you can access your money at any time in the present. And on the flip side, what might be some of the benefits of investing in a brokerage account over a 401k account?

We've named a few already, and that includes no early withdrawal restrictions, contribution limits, or employer constraints, and a lot more investment options. Another that some people might not think about is required minimum distributions, which are required for some IRAs and 401ks. With a brokerage account, you can leave that money invested, but with traditional 401ks, you generally must withdraw a minimum amount from your plan every year starting at age 73. There are some exceptions, and this rule does not apply to Roth plans.

I want to talk more about specific investment options that are available in retirement accounts, because different accounts can have very different options and costs. In preparing for this conversation, I logged into my 401k account and saw that I have access to over 20 different funds to invest in, and I'm currently invested in a target date fund that will change my investments over time to become less aggressive the closer I get to retirement. And the expense ratio, which is basically the administrative fee for the account,

is 0.08%, which is pretty low. Then I logged into my robo-advisor Roth IRA, which automatically determines my investments, and saw that the expense ratio is 0.25%, which is a lot higher than 0.08 and can add up to a difference of thousands of dollars over the years. June, would you say that investment options and fees are the two main things

that people should weigh as they compare retirement investment options, or what else do you think people should consider? Yeah, those are two very important things to consider when comparing retirement investment accounts. Specifically for between a 401k plan and an IRA, also consider the contribution limits and employer match for 401k if you get that. If comparing Roth IRA accounts between providers, some other factors to think about could include account minimums, customer support, retirement planning tools, and maybe even how easy it is to

use your desktop and mobile services. My team did a whole analysis on how to pick the best Roth IRA accounts in an article you can find on NerdWalletet and we'll link it to the description of this episode. So 401k accounts are sometimes critiqued because they may not have as many investment options as something like a self-directed Roth IRA for instance. But as Sean pointed out, we have over 20 different options in our 401k which seems like a lot. Is that normal or are we just spoiled at NerdWallet? And when might it make sense to choose one retirement account over another based on the which seems like a lot. Is that normal or are we just spoiled at nerd wallet? And when might it make sense to choose one retirement account over another based on the investments available?

We are a little bit spoiled. A bright scope and investment company Institute study found that large 401k plans offer 28 investment options on average in 2019. In their How America Saves 2024 report, Vanguard shared that their average plans offered 27.5 investment options in 2023. When it comes to choosing an account based on the investments available, consider what is available in your 401k plan.

If it only offers a handful of funds and the fees are high, such as an expense ratio over 1%, it might be worthwhile to contribute enough just to get the employer match and then prioritize an IRA. Well, Jun, thanks for going deep into the weeds with us this episode. Do you have any parting thoughts for Vicki or others who are trying to sort out different accounts and investment options for their retirement? Even though we've talked about a number of accounts today, you don't need to pick one over the others. Instead, remember that all three accounts serve different purposes and goals, and all can be part of a solid financial plan.

All right. Well, Jun Chiam, thank you so much for joining us on Smart Money. Thanks so much for having me again. And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-6373. You can also email us at podcastatnerdwallet.com. And here's our brief disclaimer. investment advisors. This nerdy information is provided for general educational and entertainment

purposes and it might not apply to your specific circumstances. This episode was produced by Tess Vigeland. Hillary Georgie helped with editing. Nick Karasimi mixed our audio. And a big thank you to NerdWallet's editors for all their help. And with that said, until next time, turn to the nerds!