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When Mainstream Advice is Bad Advice: Part 2

Wednesday we did a YouTube video about the 401(k) so, I figured why not dive into some quick information about what we know that proves that traditional retirement plans like an employer sponsored 401(k) or IRA are not the best retirement option out there.

What is a 401(k)?

  • A 401(k) plan is a company-sponsored (defined-contribution plan) retirement account that employees can contribute to through automatic payroll withholding.

  • In a traditional 401(k), employee contributions reduce their income taxes for the year they are made, but their withdrawals are taxed.

  • With a Roth 401(k), employees make contributions with post-tax income but can make withdrawals tax-free.

  • Contribution limit of $19,500/year, not including employer contribution.



Typical Financial Advisors will tell you to put your money in a 401(k), because they benefit from management fees and the government benefits from the taxes. Here's why it's not in your interest:

  • Employees are encouraged to "save" for retirement by "investing" in a 401(k). This is very misleading! The difference between saving and investing is RISK. A 401(k) is NOT a savings account but an investment exposed to swings = BIG RISK!

  • All 401(k) contributions are invested in the stock market. This means no guaranteed rate of return, high volatility, and next to zero liquidity without penalties before age 59 1/2.

  • Unlike pension plans (defined-benefit plans) where the employer is responsible for funding and guaranteeing the retirement finds, the 401(k) shifts the responsibility and risk of saving for retirement to employees. There is no guaranteed payout for longevity of life after you start receiving distributions upon retirement.

  • Employees are responsible for choosing the specific investments within their 401(k) accounts, from the selection their employer offers. Unless you're a savvy investor this presents the risk of investing in improper portfolios, for instance, over-investing in company stock rather than a well-diversified portfolio of various asset class indices.

  • Since no one can predict what tax rates will be in the future, the 401(k) is likely to have higher tax rates upon withdraw than upon contribution. This could significantly alter retirement income.

  • Because the 401(k) is a government sponsored plan it gives control of your money to the government! The tax code makes it technically owned by the government but provided for your benefit. This means they can change the rules and laws to their advantage without your consent. Basically, they can steal your money!

  • With 401(k)s, there are usually more than a dozen undisclosed fees: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder fees and more. Management fees can be anywhere from 0.5% - 2% annually.


What is an IRA?

In a nutshell an IRA (Individual Retirement Account) is the same as a 401(k) except it's not sponsored by the employer and has different contributions limits.

  • Traditional IRA: you deduct contributions now and pay taxes on withdrawals later.

  • Roth IRA: you pay taxes on contributions now and get tax-free withdrawals later.

  • Traditional IRAs: In return for considerable tax breaks, they restrict and dictate access to funds.

  • Roth IRA: function more like regular investment accounts, only with tax benefits: They have fewer restrictions, but fewer breaks as well.


What to do?

If you're interested in removing your money from your 401(k) or IRA today, you will pay a little extra in taxes today, but you’ll eliminate the larger taxes and issues like:

  • Any future distributions from those accounts will be tax free instead of taxable.

  • They won’t count against your Social Security or capital gains tax calculations the way they do when you’re in a traditional IRA.

  • You won’t have forced distributions from either of those options.

  • You’ll have tax-free money to leave behind for a surviving spouse.

  • And you should be immunized against any actions Congress might take to increase the government’s share of your savings.

Bottom line, don't be afraid to make changes to your retirement planning strategy. Replace fear with knowledge and a certainty that your money will be there when you need it! Reach out to us at Outfitter Wealth to talk about your current plan and how we can help. 👍

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