Why Are 401(k)’s The Wrong Way To Go?

Posted @ 9:05 am - Filed under Financial Planning, Retirement, Retirement Income, 401(k)'s & IRA's

Today we’ll examine what really happens over the life of a 401(k) — especially as it relates to income taxes. This may be the most successful bait & switch maneuver you’ve seen. Later in the week I’ll give you an alternative for your consideration.

What’s the big draw to the 401(k)? Duh! I get to contribute to my retirement savings while simultaneously deferring taxes on that very contribution. Sounds like a pretty good deal doesn’t it? After a little more scrutiny you may find it’s more like being near the tiger while he’s jumping through the flaming hoop — hardly a draw for the average guy. Let’s take a look at the whole plan.

First, let’s assume you put as much as you can possibly afford each year from the time you’re 25 until you’re 65. Let’s also assume those contributions have saved you almost $100,000 in taxes along the way. What’s bad about that you ask? Nothing on it’s own merit, but you want to look at the big picture, right? Let’s say you manage to build that account to a whopping $1,000,000 — a healthy figure.

Let’s also assume you’ll make an 8% yield on that million bucks for your retirement. That’s $80,000 a year! Congratulations are in order, right? Well, let’s keep going. Most folks will have done their level best to pay off their home’s mortgage, because Grandpa said that was best. Your kids are long gone too. That means you did two good jobs right? Well, that’s one way to look at it, but as it relates to your income taxes, you’ve eliminate two of your best and most reliable tax deductions — oops.

For easy math let’s use a combined state and federal income tax rate of 1/3. If you think that won’t apply to you, remember two things.

1) You have very few or no tax deductions for an income that very well may be more than you’ve ever made in your life while working full time.

2) With Social Security about to reach absolutely crisis point, (less than 3 workers per SS recipient) do you honestly believe future income tax rates won’t be higher? It’s a no-brainer. Even if they’re not, the 1/3 tax rate will apply to more folks than not.

In four years you will pay more taxes than you deferred in 40 years! And the best (worst) part? You did it on purpose. If you live only 20 years after you retire, to 85, you’ll have paid in excess of half a million bucks in income taxes!

Epiphany — You avoided paying a dollar of income tax so you would have the privilege of paying $5-10 instead.

Tell me again what a great deal 401(k)’s are. There’s more to the bait and switch.

When you die, the estate (death) tax will almost divide your estate in half. (It’s different for different amounts.) So not only do you get ripped off by income taxes galore while you were alive, but your heirs get absolutely annihilated. Is that what you envisioned when you first opened your 401(k)? Probably not.

What if…….

Is there a better way? What if you could avoid 401(k)’s, and instead invest in a vehicle providing you retirement income which will be — tax free — for life. And those nasty little rules about borrowing, and forced distributions that go with 401(k)’s? This approach doesn’t have those rules. In fact, you can borrow without paying back — no penalty. When you die — the huge cash left over will not even be part of your estate, and therefore not taxed — period.

I’ve barely touched on what’s going to happen to those who take the 401(k) approach to retirement. When planning for retirement, a Purposeful Plan utilizing capital growth techniques while investing in real estate, combined with my preferred alternative to 401(k) plans, will result in an immensely superior retirement. If you’re interested in a retirement income in six figures, most of it either tax sheltered or tax free, you’ll want to take our approach very seriously.

So the next time you hear or read about how great 401(k)’s are, you’ll know what they’re not telling you. There’s a better way.

Next up: What is the alternative?

This entry was posted on Monday, July 2nd, 2007 at 9:05 am and is filed under Financial Planning, Retirement, Retirement Income, 401(k)'s & IRA's. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.