Rich Habits Podcast - 32: Optimizing Your 401(k), 403(b), 457(b), or ESOP

Episode Date: October 2, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz breakdown employer-sponsored retirement accounts. Specifically, they explain the 401(k), 403(b), 457(b), and even ESOPs. With over 110 million Americans having access to these retirement accounts, but less than 50% of them actually taking advantage of them, we hope this episode not only teaches you what they are but also inspires you to begin using them to build wealth. ---Be sure to check out Public's new ⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

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Saving those children is how we all go home. From binge all episodes exclusively on Paramount Plus. Hey everyone and welcome back to the Rich Habits podcast, a top five and maybe soon to be top three business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job and corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most

well-known fintech companies around the world. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert and the other myself, someone who's still in the process of building wealth and figuring it all out. I'm pumped for this episode. We are now into season three. This is episode 32. We've got a lot of tailwinds behind us, and I'm really excited to dive in. So, Robert, what are we going to be chatting about in today's episode? In today's episode of the Rich Habits podcast,

we're going to be demystifying all of the different employer-sponsored retirement accounts that exist and really explain what these all mean, as well as sharing our thoughts on the best ways to participate in each what. We hear the 401K, the Roth 401K, the 403B, the 457B, ESOPs. They're all so confusing. Trust me, I've been doing this for years, and it's still confusing for me at times. But not anymore. We're going to simply explain how each of these common employer-sponsored retirement accounts work,

their tax advantages, as well as how we think people should be using them to build wealth for a comfortable retirement. And this episode is especially important, Robert, because over 110 million Americans across the country have access to employer-sponsor retirement accounts, but less than half of them actually contribute toward them, unable to take advantage of their benefits. So if you're listening right now and you're investing toward your employer-sponsored retirement account, pat yourself on the back. And if you have a coworker or know someone who maybe hasn't yet begun, send them this

podcast episode so that they now know the definitive truth as to what the account is and how to use it to build wealth. With that being said, Robert, start us off with the first account. Yes, number one and the most common is the 401k in the Roth 401K. We talk about these every single day, so we're going to dig into it and break it down for you. I deal with clients, friends, family members every single month of the year that just don't understand the difference between all of these accounts. So our first account is the most popular, and that's the 401K. A 401k is simple.

It's a retirement account you're able to open alongside your employer, whose entire purpose is for you to contribute a small portion of your paycheck to the account that will be invested towards your retirement. As a company benefit, you might also receive a percentage of your paycheck as a company match to boost your monthly investing. For example, if you make $100K per year and your company matches 3% of your salary and contributions and you contribute $3,000 per year towards the account, your employer will also contribute $3,000 to your account. A total of $6,000 is now in the account. That original $3,000 contribution you made is also tax-free, which means you're able to write off the $3,000 of your taxable income for the year,

saving you hundreds and potentially over $1,000 in taxes just for the year. Now, the maximum amount of money you're able to contribute to the 401k per year is $22,500, which is a lot of money saved on taxes if you're actually able to contribute that much. However, we don't exactly recommend doing that and here's why. So the potential downside risks that come with a 401k is the fact that it's not exactly flexible. Here's what I mean. When I worked at a publicly traded healthcare company out of college, I contributed to my 401k. However, I wasn't able to exactly choose what my money was being invested into. Instead, they parked my money inside of a few target date funds, depending on my age in risk tolerance, which, in my opinion, is not a good investment strategy, right? That is not a

retirement strategy. I had no autonomy over my money and where it was being invested. And my account often underperformed the S&P 500. This is why we believe everyone should be investing the money in this specific order. First, up to the match, right? You want that free money from your employer. Next, max out that Roth IRA. If you don't know what that is, listen to episode 31, where we domesticify the alphabet soup of finance and we talked about what the IRA is. Then once you've done both of those things and you still have money left over, now invest money back into the 401k only if you have autonomy. Only if you have autonomy. I want to say that twice. It's very important. You don't want to underperform. And if you don't have autonomy, then park money into some index funds on public.com.

Love that. And that is a really important part of this section. So I hope everyone is listening and taking notes. Now let's move on to the Roth 401K. It's the exact same thing except one little difference. Taxes. Remember, when we mention you'd be able to write off those contributions against your taxable income, well, that comes with a catch. The money you withdraw in retirement to spend and live off of, you'll have to pay taxes on that income. Whereas with the Roth 401k, you're not writing the money off your taxable income now, which means, yes, you're paying taxes on the money, but when the money grows into potentially millions upon retirement, because of compound interest, you'll be able to cash out and spend that Roth 401k money tax-free. If your employer offers this, we'd choose this version

every single day of the week and twice on Sunday over the normal 401k. Pro tip, it's never a good idea to borrow against these funds or cash them out for any reason. This is your retirement. Never borrow from your future to pay for today. Say that again. Never borrow from your future to pay for today. Delayed satisfaction is how the rich get richer. Wait until you're 59.5 years old and then enjoy the retirement money the right way. Now let's move on to number two, the 403B. So as we pivot slightly into the 403. I want to remind everyone that this account is very identical to the 401k, except they're only offered to employees of public schools and other tax-exempt organizations like churches.

Now, these accounts are also sometimes referred to as TSA accounts, so keep that in mind. Now, just like the 401K, these 403B accounts allow employees to contribute a portion of their paycheck every month to a retirement account. And also like the 401k, these 403B accounts, these 403B accounts allow employees to contribute to contribute a portion of their paycheck. accounts are just as limited in what they're invested into, which is why, again, we want to reiterate up to the match, max out the Roth, and then back to the 403B, only if you have autonomy over the investments. Yes, and also as a reminder, similar to the 401k, there are Roth 403B accounts with the same tax-free retirement benefits, and always keep in mind, without full autonomy

over these accounts, likely they're going to underperform, and I want to make sure everyone understands this, so they're optimizing on their wealth-building journey by having the proper investments in place. And number three, the 457B. Now, this next retirement account is another spin-off of the 401K, but instead of it being offered only to employees of public schools or other tax-exempt organizations,

this account is offered to government employees. The 457B, similar to the 401k, is a retirement account contributed towards through your paychecks every month with an annual contribution limit of $19,500. Now listen closely. This is very important. The 457B also has something called a double limit catch-up that allows employees who are three years away from their retirement age to contribute twice the annual limit or $30,000. $49,000. So if you're using the 457B, this is an amazing little add-on, a little pro tip that helps you out in the long run. And that is one of the benefits of the 457B that we like. That's probably also incredibly important for people who are nearing retirement and looking for some of these tax write-offs. Assuming it's not a Roth 457B and it's a traditional one through their employer. I mean, gosh, that's what, $10, $11,000 in tax savings on a $39,000 contribution. That could be huge. Just want to quickly reiterate, though, there is a Roth version of the 457B, which means no taxes on your profits when it's time to retire. Now, our last employer-sponsored retirement account isn't exactly a retirement account, but it's worth mentioning because so many companies offer it as an employee benefit. And that's the ESOP or employee stock ownership plan. Now, this is an employee benefit plan that gives workers ownership interest in the company they work for in the form of stock.

For example, let's say you're an employee of a publicly traded company like Amazon. If the company you work for offers this plan and it's part of your compensation, you'll earn shares of company stock over a period of time. Now here's the pro tip. The important term to understand with this plan and many people don't is vesting, which essentially means how much time has to pass before you're able to actually own the stock. once the allotted amount of time passes, sometimes one year, two years or three years, maybe even four years, it totally depends on the company. You'll have possession of the stock and be able to do with it what you will.

So make sure you understand and read up on the vesting schedule within this plan before you jump in head first. I also want to encourage people to think about this ESOP as part of your compensation, not your retirement. So here's what I mean. Companies, especially single stocks, sometimes they outperform the stock market. Think Apple or Microsoft or Amazon. While others sometimes drastically underperform, think about Disney, for example, right now. Disney stock is at like 2016, 2015 lows, like 10 years ago lows. That's terrible. As you receive the stock, don't be afraid to sell the stock and put that money into index funds on a public.com or maybe diversify that into real estate on fundraise or some sort of alternative investing strategy that you. you have. I think that was a mistake that I made when I was out of Medicus. I had an ESOP, and this was the company I worked for out of college. And I think I had maybe two or three thousand

dollars given to me an employee stock. And I was like, oh, this is great. It's just going to keep going up. We're going to have fun. And then the stock came tumbling down during the pandemic. And I lost half my money, right? All because it was so concentrated into this one stock. So when you receive the stock, don't be afraid to sell it. It's all good. It's part of your compensation anyway. don't think about it as a long-term retirement plan. I love this point, and most people don't even understand when it comes to vesting and getting company stock that it truly is part of your compensation. Everyone looks at it as a gift from the heavens that goes towards your retirement, and it really

isn't because many times that stock is in lieu of maybe higher pay or a better overall package, so it doesn't come free of charge. So make sure you always understand once vested to do what's best for you with that stock. Don't feel guilty in selling it just because you work for the company. You want to make sure you're always optimizing all of your investment strategies, even if it was through stock that you feel you got for free. I couldn't have said it better myself, Robert. With that being said, let's hear from this episode's sponsor.

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as excited as well. Time for everyone's favorite segment of the podcast episode. And by the way, we have a surprise for you this Thursday. What we're doing is we're going to introduce a new weekly episode. That new weekly episode is going to be entirely dedicated to question and answer. We're going to sit down for 20, 30 minutes and introduce a bunch of questions to you all that we receive in our Instagram and Discord and share them and have a whole episode dedicated to Q&A. We're probably going to answer 7, 10, maybe 12 questions. Who knows? So tune in now every single Thursday. Be on the lookout for that one for an entire episode dedicated to Q&A. All the good, fun, juicy questions and juicy answers.

You guys are asking, so we're delivering. Love it. Let's go. With that being said, our first question comes from Lydia. Lydia says, I know you guys are all about diversifying. What do you think about the people who say diversification is the dumbest strategy I've ever heard? Go all in on a couple of things and do them really well. I've heard this financial advice from several people recently, but also know so many that recommend diversification such as yourselves.

Have you guys heard of this take? what's your immediate reaction? I love this question, Lydia, and I can't wait to dig in. I get the philosophy of going all in on one thing, but ask yourself this question. Let's say you go all in on one industry, one business, one sector of investing and living and building. What happens if that sector implodes? So you have to always be concerned. In the beginning, maybe yes, you go all in on one thing. You're building a business. You're excited about it. It's starting to make money. That's great. But as soon as you can get that base built and diversify, in my opinion, I think it's a must. Because if you think back, even recently, let's go back to 2009. If you were all in on real estate,

you got wiped out. You were starting over. You were losing all your properties, losing your primary house, probably even your cars, because you thought you could do no wrong in real estate. And guess what? If you would have been diversified back then, like I was, you would not have gotten wiped out. So why I love diversification is because that way I know that I'm hedged, that no matter what happens in any one given industry, I am covered and I'm never going to go broke and I'm never going to go backwards and lose everything. I want to take a different approach. I want to think about diversification now as diversification of time. a lot of people to be really good at something and go all in on one specific, you know, investment or strategy or industry, they have to educate themselves tremendously on that specific strategy, business, whatever it is, right? Think about it like this. Mark Zuckerberg, he was in college,

and so he went all in on Facebook. He spent every waking moment building this company. He wasn't spending time with his friends. He wasn't going on vacation. He wasn't making memories in college. He was building a company. And because he didn't diversify his time away into other more enjoyable things, he now is a multi-billionaire. Now, I'm not saying everyone listening right now is going to be able to do that, but some people will actually just laser focus, spend all the waking time, energy, and focus on a specific thing. And it might yield them a ton of money in the future, but at what cost, right? So I think when you also think about diversification, what's really important is to think about higher diversifying your time, what makes you happy. and if investing into passive index funds, we all know it's a good way to build wealth.

It's a very consistent way to build wealth. It has been for several decades now. And if building wealth slowly is something you're comfortable with, so you can have free time to go hang out with your friends and make memories and try hobbies, like go do that too, right? Diversification is not just money, but it's also how you spend your time. And I want to follow up on that a little bit, and that's a great outlook different from mine.

But also as me being the elder statesman here of the Rich Habits podcast, I've been through it all where I've personally spent five years, 10 years on one specific sector or business only to have it fail or maybe just fade away because times have changed and the offering may not have been good anymore for the public, especially when you're dealing with like a consumer product or a service. Things change. So that's why for me, I would never recommend anyone being all in

for long periods of time on one thing, because if you lose that and you don't have a backup plan, you're going to go broke. So that's the only reason I say get your base from one thing, or maybe two things, then diversify so you have that safety in knowing you're across, you're invested across a bunch of different sectors. That would be my takeaway. Our next question comes from Ujiro. Ujuro says, can you buy a rental property with less than 20% down? what options are out there that I can explore. I already have a primary home and have a mortgage on it, but I'd like to own a rental property as well. Now, I know Robert, he has way more experience than I do in real estate. So I'm going to let him answer this question. But before that, I just want to encourage you, I think scroll back to episode like 14, 16, 18, about, you know, call it 15 or 20 episodes ago. We made an episode that was called becoming the first real estate investor in your family. And we walk through a bunch of different ways for people. people to qualify for mortgages and lending and things like that to go buy the first piece of real estate. So that's a really good episode. Go listen to that one for a share. But Robert, take it away.

Yes, I love this question. And Ujero, I hope it's Ujero. I didn't ruin that pronunciation. But yeah, I would say the key here is understanding what your options are. You might qualify for a VA loan. There's some options there. A self-employment loan, we don't know what you do. But say you own a company, you could do a self-employment loan, which is great because they go off of your bank deposits. And for a self-employment loan, it's only required that you put 10% down. And there's also everyone's favorite, which is the FHA loan, which is 3.5% down. So keep that in mind, there are several options out there. If you're trying to keep your money invested and keep more of your cash on hand for other investments, there are other options that are less than 20% down.

I guess my only take on this is just want to really encourage you to make sure that you're in the personal finance position to afford that second house. You know, as Robert and I have said a hundred times, it's not all sunshine and rainbows. Whenever you're able to finally get that rental property and a tenant's in, now you're hanging out, oh, passive income. Like, you know, be careful. Maybe think about house hacking for sure. And at the end of the day, I just want to encourage you not to be house poor.

Yeah, one way to look at the house hacking. you could literally take the house you currently have and rent that out, buy a multi-unit with an FHA, live in one of those units, and then you get around the 20% and you get the best down payment percentage, which is 3.5% through the FHA, and that way you'd be able to make those moves because you can do up to four units with the FHA low. Jouro, you heard it here first. There you go.

Our last question comes from Michaela M. Michaela says I'm very interested in building wealth. However, I'm having trouble finding like-minded people that have similar goals as me. I live in a small town and it seems impossible. Should I keep trying to find these people or just get started and keep it all to myself? I love this question, Michaela, and honestly, it's all about getting entrenched. And that doesn't mean locally, I'm saying you're already here watching the Rich Habits podcast. You're probably joining Austin and my lives on TikTok.

Maybe you belong to my private community, the money mindset community. There are so many ways to meet like-minded people virtually and then start going to those meetups, going to those masterminds where these groups of people you're getting to know that are like-minded are going. And I think that's just the best way because you're not always going to find like-minded people that are in your neighborhood or go to your coffee shops. One of the reasons I moved away from Denver was because I just couldn't find like-minded entrepreneurs in my area.

and it was very difficult because there wasn't a lot of that happening at local meetups or Facebook groups. So I think you can do it virtually, get to know people better, and then really start to join those masterminds and those groups and those events to be able to have those people close to you. Just want to double click here on that virtual call out that you had, Robert, right? We have the Discord group. About 200 people are in there asking questions, communicating, helping each other out. So be sure to join that using the link in the show.

show notes below. You know, Robert and I both have our respective newsletters. Mine's called rate of return. His is called money mindset. And, you know, the final point here I want to make is, and it's probably the most important one, as you start your wealth building journey, I want you to make sure that you're surrounding yourself with information. You're constantly flooding your inbox with new information about investing or the markets or real estate or whatever is important to you, right? A really good newsletter that I read every morning that I highly recommend everyone listening to the podcast take a look at. It's called grit capital.

It's gritcap.io is their website to go check it out. And so it's a super fun, easy way to just spend five minutes making sure you're up to date on all things, personal finance and investing. I don't post my own newsletter enough to do it every day. It's every week, so make sure you're checking that out. But like, maybe go to Twitter and find some accounts that are always talking about it and turn on their notifications, right? There's just so many ways as someone starts their wealth building journey that they can begin

to arm themselves with new information as it relates to. to personal finance and investing, that isn't sort of a chore, right? It sounds fun. It's exciting. Like, there are so many people out there that are sharing information from their own unique perspectives that might resonate with something that you're going through. And you might just find that on Twitter or in a newsletter or in a podcast like us, right? So don't be afraid to diversify all the different types of ways that you're consuming content as well.

This is amazing. And, Michaela, I love the question. And don't get discouraged. I just want to make sure, as the last takeaway from me on this question, is that you understand there are tons and tons of people that are like-minded out there and you can find them virtually, become friends with them, and that will just fill that gap for you of being able to have people to bounce ideas off of by joining these communities, joining the discords,

and really just getting involved with the right people, because we've all heard the old adage, you are the five people you hang around, and you don't want to drag your financial life down if you're hanging around a bunch of local people that just aren't going where you're going financially. So always keep that in mind. They don't have to be right next door to you to be able to get the benefits of those friendships and that kindred spirit of what you're trying to accomplish in your wealth building journey. Thanks, everyone, for listening to this episode of the Rich Habits podcast. we are neck and neck right now to be a top three podcast on Spotify in their business categories. So if you're listening on Apple, I encourage you.

Go listen on Spotify. We're trying to chart a little bit better. And to those of you who have helped us come to where we are today and achieve this awesome, awesome ranking so far, we could not be more grateful. We are super, super excited to be where we are today. And knowing that with everyone's support, we can chart maybe to number one. Again, thank you all for following along on this journey with the Rich Habits podcast. Please, if you love what you see, share it with a friend.

Maybe they're not on their wealth-building journey or they're not sure what to do with their 401k. Share this episode. And if they love it, tell them to give us a nice five-star review. Over 2,000 of you have already done that and we'd love to keep that going. And we appreciate each and every one of you coming along on this journey with us every week. Have a great start to your week.