It’s time to ditch the 401(k) plans that many Americans rely on to save for retirement, says Pamela Yellen, financial investigator, two-time New York Times best-selling author, and long-time critic of the 401(k).
The No. 1 Reason to Dump Your 401(k) Plan: Totally Unpredictable Future Tax Liability
Retirement planning experts increasingly note that one of the biggest appeals of the 401(k) - the ability to make contributions with untaxed dollars in exchange for tax-deferred growth and withdrawals - is disappearing. Pamela explains why.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
“The national debt was already skyrocketing before the pandemic spurred the biggest fiscal stimulus programs in history,” she notes. “And a surge in unemployment has lowered tax revenue for federal and state governments.
“What do governments typically do to counter budget deficits? They raise taxes, of course! And as taxes rise, deferring them in a 401(k) plan or IRA means you’ll pay more later – potentially a lot more.”
Even before the pandemic, people were losing 25% to 33% of the value of their 401(k) to taxes, Pamela notes.
“Most people are shocked when it happens because they forget they’ll owe the IRS taxes on every penny they’ve put in and every penny of growth they’ve deferred,” she says.
Because no one knows what tax rates will be in the future, no one saving in a tax-deferred 401(k), IRA or investment account can know what their retirement account(s) will actually be worth when they want to tap into them, Pamela says. She shares six additional reasons the 401(k) has failed, including:
The Employer Match
The employer match turns out not to be “free money” after all. Companies that offer matches simply make up for it by paying less, the Center for Retirement Research found.
- The employer match isn’t guaranteed. Thanks to the pandemic and shutdown, many companies have reduced or suspended the match.
- Employees typically have to stay with a company 4 to 6 years to be able to keep the full match. How’s that working out for the tens of millions of people now suddenly out of work?
- Fees in 401(k)s and IRAs compound against you and can easily devour 30-50% of your savings, according to Brightscope and the Department of Labor.
- You have little to no control over the money in your 401(k) or IRA – the government imposes numerous restrictions and penalties if you don’t follow their rules to the letter.
- The man who invented the 401(k) – Ted Benna – now says it’s a "monster that’s out of control." In recent years Benna revealed he now puts most of his own money into the savings strategy Pamela advocates, most commonly known as the Bank On Yourself safe wealth-building strategy.
Advantages of this savings strategy include:
- Guaranteed, predictable annual growth regardless of what's happening in the markets.
- A 160-year-plus track record of positive growth that historically has been significantly greater than savings or money market accounts and CDs.
- Security and safety — it’s highly regulated, backed by a multi-layer safety net, and bypasses Wall Street.
“Life has plenty of uncertainties and unpredictability without adding the worry of whether your retirement savings will be there when you need them,” Pamela says.
About the Author: Pamela Yellen is founder of Bank On Yourself, a financial investigator and the author of two New York Times best-selling books. Readers can get a free copy of her latest book, "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans — and How to Avoid Them" here for a limited time.