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 Market Mysteries of the week

  I have a 401(k). Am I investing?

Answer:Yes! You own companies. Your wealth is growing.What kind of investment is a 401(K)?A 401(k) is not an investment. It’s a type of retirement savings account. There are all kinds of accounts - checking, savings, brokerage, 529, custody, trust, IRA, Roth IRA, and more. What makes them all different are the rules around how they are taxed.Retirement savings accounts have a special tax treatment that makes it easier for individuals to grow their wealth tax-free. Typically, when you sell an investment like a stock, you have to pay taxes on your profits. You might also have to pay taxes on the dividend income you receive from your stocks. If you’re investing for retirement over the course of 20-30 years, you can imagine those taxes becoming a burden. Investments held in retirement savings accounts are exempt from those taxes. So you can grow your wealth faster by reinvesting dividends without paying taxes and rebalancing investments without paying taxes on the stocks you sell.A traditional Individual Retirement Account (IRA) lets you add pre-tax dollars but then taxes your distributions later as income. A Roth IRA lets you add dollars that have already been taxed and never have to pay taxes again. 401(k)'s can similarly be either "traditional" or "Roth." Accounts like 401(k)’s for companies, or 403(b)’s for non-profits, are just like IRA’s but structured through your employer. Your employer might typically offer to match the money you contribute to the account, meaning if you add $5,000 each year, they might give you a free $5,000. Usually, there’s a maximum but definitely look into it. That’s free money.What am I invested in, then?That’s an important question. You should find out. Since IRA’s are accounts you open on your own through a financial institution, you typically can choose your own investments like stocks or funds. With employer-sponsored plans like 401(k)’s, you typically have to choose from a menu of options that the employer offers. Typically, they’re all the same brand, like Vanguard or Fidelity, depending on who your employer is working with.The menu of options is typically similar across every provider. They’ll have “Target Date” funds, in which you’re paying for someone to choose your investment mix of stocks and bonds. They’re typically well-diversified and follow standard investing principles around appropriate risk for a given timeline. You’ll also see many funds that will give you access to different markets or sectors you might want to invest in. For example, you’ll likely see an “S&P 500” or “US Large Cap” fund to invest in major US corporations, or maybe “Emerging Markets” funds to invest in faster-growing countries, or even “Growth” companies in different regions.So at the end of the day, you’re still investing in companies. There might be commodity options like gold, but mostly this is just a different account for investing in companies’ stocks and bonds.Make sure you’re not keeping cash in a retirement account. Long-term savings should be invested to beat inflation.Do I need to be doing other investing?It depends on your financial needs and timeline. The money you put into a retirement savings account has to stay there until you’re almost 60. Otherwise, you have to pay penalties. So if you think you need to be saving for any big goals like buying a house or paying for education that might happen before you’re 60, you should consider other investment accounts. Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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