"Max out your 401(k), then your IRA" is typical financial advice we hear again and again.
But is it good advice?
In some situations, it makes sense to take advantage of a qualified plan investment match. But qualified retirement plans such as 401(k)s, 403(b)s, IRAs, SEP IRAs, etc. are inherently problematic, particularly the "tax-deferred" variety (which is typically anything that's not a Roth.)
Just some of the problems with these retirement accounts include:
- Lack of access to the money. Too many people either can't get to the money when they need it, or only at the high cost of taxes and penalties, paid at an inopportune time.
- Lack of choice in your investment options. Almost all choices are typically some form of mutual fund.
- Lack of control over the investments themselves. 401(k) and IRA options are typically stock-market-based funds that are subjected to the roller-coaster ride of the market.
- The opportunity costs you'll pay because you don't have liquidity. When you have liquidity and financial flexibility, you can take advantage of better investment opportunities that arise.
- Slowed growth due to often-bloated fees. 401(k)s and similar plans tend to have bloated fees and layered costs (plan administration plus fund fees) that can add up to as much as ALL of your contributions, as we illustrate in Busting the Retirement Lies. LINK!
- Lack of efficiency in transferring wealth. When transferred to an heir, they will have to pay income taxes on inherited 401(k) disbursements.
- Lack of control over the tax rate you will be paying when you take disbursements.
Would you accept a loan from a stranger if you didn't know what rate you were going to pay when the loan is paid back? You might think, "of course not!" Yet taxpayers in tax-deferred retirement plans are doing just that - except it's no stranger. By taking a tax deferral, you are temporarily "borrowing" the money you would normally have spent on taxes from a severely in-debt government for a limited time. One day, you will have to pay income tax on your original earnings - PLUS the growthearned in the account - at whatever the prevailing tax rates are at the time. Do you think taxes are going up or down?
Whatever you do, don't just delegate your retirement plan dollars to your employer's plan administrator, the government, and the whims of the market.
To find out more about your qualified plan and formulate a efficient financial strategy, call me!