Description: The article mentions 401k. The author will talk about the money myth which means you should max out your 401k, the essence of this is that the best place in the whole wide world for your money is this box called 401 K focusing on investing for liquidity, emergencies other than this delayed environment called retirement.
This is Kim Butler, today’s money myth is that you should max out your 401k, that’s ma X, it could be 401 K, could be 403 B, but the essence of this is that the best place in the whole wide world for your money is this box called a 401 K and you should put as much in it as possible.
So the challenge here is that everybody is talking about this whether it’s the government, whether it’s the financial service providers, whether it’s the man next to you in the cubicle or down on the ramp or wherever everybody is maxing out their 401 K ma X, people completely focus on their 401 k plans or their retirement plan.
That’s the only place where money is going tend not to have money anywhere else, in other words, they fully focus on investing and they’re not saving anything for liquidity, for emergencies, for opportunities or any other thing other than this delayed environment called retirement.
So maxing out your 401 K is a myth, because it leaves you unable to take advantage of opportunities or solve emergencies and the statistics are crazily high about the number of people that leave an employer and cash in said 401k or 403b plan paying penalties and taxes.
The taxes are not going to be avoided, they’re going to be deferred, but still the pain of a penalty happens, because you have no savings, no liquidity, no emergency, opportunity money, so the better solution to this environment instead of maxing out your 401k is to contribute only up to the match level ma tch.
So most companies offer a match, so if you don’t have a match at all, then I think you have to question whether you should have dollars going into the 401k, we’ll talk about that in a minute, but for those that do have a match, if the company is going to match your dollars, save 50 percent of your income up to four percent or six percent or whatever the match is.
Then I am supportive of contributing the dollars up to the match level ma TCH, but not up to the max level ma X, what if your company’s not matching, then you have to take a look at your own discipline, because one of the positives of firoan case is that you get self imposed discipline, because those dollars are stuck inside that 401k plan.
If you have good discipline, you don’t need self imposed from the plan, you can self impose your own discipline and save dollars that can go into something that you could get at, but is not locked up till 59 and a half like 401ks and 403 B’s.
The other issue is the taxation, a lot of people are doing the maximum into 401ks and 403 B’s, because the tax deductibility of those contributions today, the challenge with that is that they are fully taxable down the road when we take them out.
When firoan case was started that worked fairly well, because tax rates were fairly high at the time and it was very common that you would be in a lower tax bracket, because taxes were going down and you might have lower income when you took the money out.
So you are putting the money in and getting a text deduction on the high side, taking it out on the low side, but as we record this in 2016, most people think that taxes are going up, so here you are in your 401k getting a deduction in what could be a low tax bracket environment to potentially take it out, fully taxable in a high tax environment.
This is obviously not a good strategy, so if you believe that taxes are going up and you do not have a match on your 401k, then you are probably better off not contributing to the 401k at all.
If you have a match, you might contribute up to that level even if you do think that taxes are going up because of the access to that match, one additional challenge within this 401k and 403 B environment is your investment choices, because typically your employer is going to offer maybe 10 or 20 different mutual funds.
Some of them might be target date funds which we have real challenges with, but regardless you’re limited, you only get to pick for the account those funds that are available to you.
Then if your employer switches their provider, then you have to switch also even if you didn’t want to sell your mutual funds at that point in time and who the 401 K and 403 B plans benefit is the government that ends up potentially getting more taxes and the financial service providers who get so many of the fees.
It amazes me, many clients have said I don’t want to take money out of that 401 k plan, because I’ll have to pay taxes, so they leave it in which means the accounts growing, which means the fees are growing.
This idea that we’re going to be in a quote lower tax bracket at retirement means that we don’t have as much money during our retirement years, as we do during our working years, that’s not a good goal, that’s not anything that we should be seeking.
This idea has been perpetuated to make us think that being in a lower tax bracket at retirement is a good thing, it’s not a good thing, it also means lower income, so head on over to Amazon and grab the book busting the retirement lies and take a look at the proof that maxing out your 401 K is a money mess, so if you would like some more information, go to partners for prosperity.