Continuing on with our series on the pitfalls of 401(k)s, here are four more reasons why you might want to rethink your stance on that particular retirement plan.
6. Tax scares lead to under-utilization
Yes 401(k)s are tax deferred, meaning you avoid paying them today in lieu of paying them later, but today’s taxes are historically low compared to the days of 50, 60, or even 90 percent marginal rates of the past. Chances are that with the record national debt, by the time you get access to that money, the taxes will be much higher than they are now. If you hate paying taxes now, why would you want to pay more in the future? When the time finally comes to live off that money, retirees are demotivated to use their savings for fear of triggering hefty tax consequences.
7. You’ll likely be in a higher tax bracket down the road
It’s funny that people imagine themselves working their whole life, only to be in a lower tax bracket at the time of retirement. Let’s be real, if you have achieved any measure of success, you’ll be well past your old tax bracket at the time of retirement. This means that your 401(k) will be subject to even more of a taxable burden.
8. Where’s the exit?
With penalties for early withdrawal, complicated borrowing rules, and taxes, there are more incentives to leave the money alone than to actually use it. It’s very easy to get it in, but how easy is it to get it out?
9. 401(k)s are like sitting ducks for estate taxes
Since there’s all those nasty penalties and taxes, at the end of a person’s lifetime their 401(k) often ends up being a nice pile of cash that look very tempting to the government. And if it’s passed on to your family or loved ones? It’s hit not only by income tax, but estate tax as well. Double the taxes, double the fun (not!)
Still think the 401(k) is your best friend till the end? Join us next time for the conclusion to our 401(k) series.
As always, feel free to contact us directly if you have any questions or would like to schedule a free financial workshop to discuss your future!
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