The government is all about creating solutions and fixing the problems of the world, right? For instance, take Social Security, which was established in 1935 by President Roosevelt. This, of course, was the government coming to the rescue for people who didn’t save on their own, so the government decided it was a good idea to take on this job for all of its citizens.
There are talks about this going to an even deeper level, forcing Americans to contribute to what is already being referred to as the myRA, which would essentially be nationalization of401(k)s. This, of course, is being pitched with the motives to help people save and guarantee a return on their money.
401(k) account questions are probably the top questions we receive here. Many are just looking to maximize their returns: some are scared of a dollar collapse destroying them, and many of you are wondering if we’ll ever be safe from nationalization in the future. There is a huge risk when putting your money in a 401(k), and it’s one that many people don’t consider.
Before I get into the risk, I do certainly owe it to you to discuss the pros. First of all, 401(k)s do actually encourage people to save, and for most people, saving money is a really difficult task. So being able to save anything and tie up the money so it’s not likely to be touched is actually a really positive thing.
401(k)s do offer an initial tax savings and they defer your taxes until a later date. In theory, this works out best because if you are in your prime and working, you will likely be making more money and be in a higher tax bracket than when you do decide to retire and your income drops. So when you pull the cash out, it will likely be at a lower tax bracket.
Employers often offer matches up to a certain percentage of earned income to contribute to an employee’s 401(k This is actually the main reason why I would suggest considering a 401(k) – because it could be free money. If someone makes $100,000 and the employer matches up to 5%, that is up to $5,000 of additional money into someone’s savings account and a 100% return right off the bat on the $5,000 put up by the employee.
As for the negatives related to 401(k)s… I actually hate being manipulated by the government and having them tell me what to do. Incentivizing me to save by giving me tax breaks for my contributions is control, as far as I’m concerned.
401(k)s ensure Wall Street gets their steady flow of monthly purchases of equities. 401(k)s are cash cows for Wall Street, and Wall Street has come to depend and benefit from the masses who elect to fund their 401(k)s and go with the program.
I don’t plan on being in a lower tax bracket, so this idea that I will be able to withdraw money at a lower tax bracket because I won’t be making as much doesn’t appeal to me.
However, the biggest issue related to the 401(k) is actually related to one of the positives, and that is the deferred taxes. Sure, you don’t pay taxes on the money now, but you have no clue what the taxes are going to be in two or three decades, either, which could essentially be a blank check straight to the federal and state government.
We don’t know what income taxes will be… but they’ll likely be higher. The rule where it says you can withdraw the money penalty-free at 59 and a half…they can change that to whatever age they want to at anytime. For all we know, the government could change the minimum withdrawal age to 70 and the highest tax rate to 75%.
Here is a chart of income tax rates from 1913 to 2011. This isn’t exactly the most stable number you could have come up with to plan your retirement withdrawals.
In the end, you have to do what is best for you. If you need the 401(k) incentive to help you save money, do it. If you have a generous employer that matches what you contribute to your plan, do it. If you believe taxes will be in your favor when you are withdrawing your money, you also might opt to go all-in on this. But for others, managing your financial future outside of the cookie-cutter plan might be the ideal strategy for you.