About this Video

• Video Title: Should I Stop My 401k Contributions to Reach Financial Freedom Sooner? 🤔
• Channel: Dividend Diplomats
• Speakers: Lanny, Burke, Bert
• Duration: 00:13:30

Introduction

This video discusses whether one should halt 401k contributions to accelerate achieving financial freedom. The hosts analyze the trade-offs between tax advantages of 401k contributions and the immediate access to funds for investment in a taxable account. They use a hypothetical example to illustrate the financial implications of each approach.

Key Takeaways

• Tax Advantages of 401k: Traditional 401k contributions offer tax deferral, leading to significant tax savings in the present. However, withdrawals before age 59 1/2 incur penalties.
• Opportunity Cost: Stopping 401k contributions means losing the tax benefits and potentially employer matching contributions. The money saved on taxes can be reinvested elsewhere.
• Yield vs. Tax Implications: Investing the money saved from taxes in higher-yielding dividend stocks can lead to greater income immediately, even after accounting for taxes on those dividends. This is weighed against the potential long-term growth of a 401k.
• Personal Finance Decisions: The optimal strategy depends on individual financial situations, tax brackets, risk tolerance, and time horizon. The decision hinges on whether immediate income generation or long-term growth is prioritized.
• No One-Size-Fits-All: There's no universally correct answer. Factors such as employer matching and individual tax brackets significantly influence the decision.

The video discusses several investment options:

• Fidelity S&P 500 fund (FXAIX): This is the fund used in the 401k example.
• SCHD (Schwab U.S. Dividend Equity ETF): A high-dividend-yielding ETF considered as an alternative investment.
• VIM (Vanguard Mid-Cap ETF): Another ETF considered as an alternative.
• VIG (Vanguard Dividend Appreciation ETF): Yet another ETF considered.
• VO (Vanguard S&P 500 ETF): Compared to FXAIX.

The discussion focuses on comparing the yields of these options to illustrate the trade-offs between tax-advantaged 401k growth versus immediate income from higher-yielding investments in a taxable account.