TikTok has dominated headlines recently, but its influence on pop culture has been building for years. As a father of young adults and a teenager, I understand the appeal and entertainment value. And, as my kids have recently shown me, TikTok is also a place to learn new and interesting things. As they shared with me the more positive educational potential of TikTok, I began to wonder what the social media platform had to say about my favorite topic: 401(k) plans.
Could TikTok be a helpful source for 401(k) advice? I decided to find out — and quickly went down the rabbit hole. While there’s some helpful input, here are a few of my observations:
- Many 401(k) TikTokers have ulterior motives. The most common theme I encountered was TikTokers disparaging the benefits of 401(k) plans in order to sell alternative types of investments, such as insurance or real estate.
If you engage with any type of financial content on social media, it’s important to understand the financial motives of the source. Remember that social media influencers aren’t held to a fiduciary standard, which means they don’t always have your best interests in mind with the content they create.
- There’s a TikTok bias against saving for the long term. I saw a lot of TikTok content warning that market volatility, like we’ve been experiencing recently, will reduce your account from a “401(k) to a 201(k),” implying you’ll lose half the assets you invest. While market volatility is an important consideration whenever you decide to invest, keep in mind that over the long term, markets trend upward.
Some influencers would have you believe that market timing behaviors can help you get ahead. In reality, the highest returns are typically achieved by those who take a long-term approach to investing. That’s because the best days in the market are often concentrated around the worst days in the market. Taking your money out of the market to avoid a potential drop means you also risk missing out on a potential recovery.
- TikTok seems convinced 401(k) plans are just tax traps in disguise. I found this argument was often made by influencers who were trying to sell variable universal life insurance, annuities and other insurance-based products, which goes back to my point about many TikTokers having ulterior motives.
Yes, it’s true that 401(k) plans come with important tax considerations. For example, if you contribute on a pre-tax basis, your 401(k) withdrawals in retirement will be taxed as ordinary income, and you’ll need to take required minimum distributions (RMDs) eventually. And if you take a distribution from your account prior to reaching age 59 ½, you may be subject to an additional 10% early withdrawal penalty.
However, there are also tax benefits to contributing to a 401(k), such as a reduction in your taxable income during the year in which you make pre-tax contributions. Also, your assets are able to grow tax-deferred for as long as they remain in the account.
Keep in mind that insurance products typically charge a premium in exchange for coverage. While they may offer some tax-advantaged “distribution” options, be sure to evaluate the cost of the ongoing insurance premiums. A qualified financial professional can help you weigh your various options and determine which type of retirement savings strategy makes the most sense for you.
When I finally recovered from my TikTok scrolling, I realized that some of the concepts mentioned could be worth exploring. However, overall, using a 401(k) or other qualified workplace retirement plan as a tax-efficient retirement savings vehicle is tough to pass up as your primary option. Keep in mind that 401(k) plans offer several valuable benefits other strategies simply can’t compete with, including the following:
- Employer matching contributions – Many employers recognize the importance of helping their employees save for retirement and offer to match a portion of employee 401(k) contributions. There are few other retirement savings vehicles that offer to contribute consistently and directly to an individual’s retirement savings.
- Low fees – When compared to most other forms of retirement savings, 401(k)s consistently rank among those with the lowest fees. Some employers will cover administrative and recordkeeping costs on behalf of their employees, making 401(k) plans an even more cost-efficient retirement savings option.
- Tax flexibility – I’ve already touched on the tax considerations of 401(k) plans, but if you remain skeptical, you may want to look into Roth 401(k) contributions. If your plan allows Roth contributions, these after-tax retirement contributions would be exempt from taxes when withdrawn in retirement — and they aren’t subject to required minimum distributions (RMDs).
- Automation –One of the most valuable benefits of 401(k) plans is that your contributions come directly out of your paycheck. Consistency is the cornerstone of any retirement saving strategy.
Some retirement plans go a step further, allowing you to opt in to automatic contribution increases. By electing “yes,” you give permission for your contribution amount to automatically increase each year at small intervals, such as 1% or 2%. The chances of you noticing the impact of these small increases on your take-home pay are slim, yet the potential benefits on your retirement savings over time can be huge.
In short, the next time I defer to the “experts” on TikTok, it will be for golf swing tips, new dance moves or cute relationship memes to send my wife.
I am a 401(k) plan consultant, host the podcast 401(k) Roundtable and write about retirement plan topics that impact both employers and employees.
Read the full article here
