Should You Dump Your 401(k)?
Most people know about one, maybe two choices when it comes to retirement planning. The most common is an individual 401k. The other is a Roth IRA. There are more Government sponsored plans, but these are the two most common.
If you are making a decision between a Roth and a 401(k) plan, consider what your goal is in saving money for your future. If you are trying to save up enough money to live on, a 401(k) may not be the best choice. That's because the better you do, the more in taxes you pay. In fact, you may end up paying back more in taxes than you've saved.
Focus on one of the "truths" you are constantly told about these plans. You are told that you'll be in a lower tax bracket. Does that make sense? If that were true, then it means that you are making less money than you are now. After you adjust for inflation, you could be living a very different lifestyle than what you had first imagined. What I'm trying to say in plain English is that if you are in a lower tax bracket it's because YOUR BROKE! Do you want to be poor in retirement?
Your other option, you are told, is the Roth IRA. The Roth is an interesting creature. It gives you the ability to contribute after tax dollars in exchange for tax-free retirement income. Now, there's nothing inherently wrong with that. The problem is not in the tax benefits, but rather the contribution limits. It is typical to find out that you will never be able to save enough money in a Roth.
The debate is really about which Government retirement plan is the best? But, the question ought to be: do you need a Government sponsored retirement plan in the first place? According to DALBARinc.com, most investors average less than 6% over their lifetime. In qualified retirement plans, you may be paying an extra fee on top of that (especially for 401(k) plans).
What would be an alternative to using Government sponsored plans? High cash value life insurance would be one example. High cash value insurance can net between 5-6% tax-free over your lifetime, and the cash values are guaranteed. Many major banks and corporations use life insurance as a way to safely conserve money or to build a guaranteed pension. For example, the "king" of cash value insurance, William Ryan of TD BankNorth, has his pension funded by the corporation...his annual premium? $1,260,000.
If you are making a decision between a Roth and a 401(k) plan, consider what your goal is in saving money for your future. If you are trying to save up enough money to live on, a 401(k) may not be the best choice. That's because the better you do, the more in taxes you pay. In fact, you may end up paying back more in taxes than you've saved.
Focus on one of the "truths" you are constantly told about these plans. You are told that you'll be in a lower tax bracket. Does that make sense? If that were true, then it means that you are making less money than you are now. After you adjust for inflation, you could be living a very different lifestyle than what you had first imagined. What I'm trying to say in plain English is that if you are in a lower tax bracket it's because YOUR BROKE! Do you want to be poor in retirement?
Your other option, you are told, is the Roth IRA. The Roth is an interesting creature. It gives you the ability to contribute after tax dollars in exchange for tax-free retirement income. Now, there's nothing inherently wrong with that. The problem is not in the tax benefits, but rather the contribution limits. It is typical to find out that you will never be able to save enough money in a Roth.
The debate is really about which Government retirement plan is the best? But, the question ought to be: do you need a Government sponsored retirement plan in the first place? According to DALBARinc.com, most investors average less than 6% over their lifetime. In qualified retirement plans, you may be paying an extra fee on top of that (especially for 401(k) plans).
What would be an alternative to using Government sponsored plans? High cash value life insurance would be one example. High cash value insurance can net between 5-6% tax-free over your lifetime, and the cash values are guaranteed. Many major banks and corporations use life insurance as a way to safely conserve money or to build a guaranteed pension. For example, the "king" of cash value insurance, William Ryan of TD BankNorth, has his pension funded by the corporation...his annual premium? $1,260,000.
About the Author:
Author information: Only so much information can be covered in one article. If you want more information about any aspect of planning your personal finances, please visit David's website.
posted by Debt Consolidation Loan at
8:22 AM
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