Insiders Look at the 401(k) Tax Saving Strategy

Funny how 401k’s are called ‘savings’ plans when in fact they are ‘investment’ plans. Savings are meant to be ‘safe’ and investments come with a degree of, high, medium or low, ‘risk of loss’.

How Much Tax Have You Really Saved When You Withdraw Your Retirement Income From Your 401(k) 30 years later?

Step 1.

First we will look at the restrictions your money has been placed under within this financial vehicle, assuming a 30 year accumulation period.

I call them the IRC 400 Plan GOTCHA’S

* Pre 59 1/2 Penalty, plus taxes

* Post 70 1/2 penalty, plus taxes (4,000 per day!)

(If you start contributing at say age 25 and you live to say age 90 that = 65 years.  There is only an 11 year period between the ages of 59 1/2 and 70 1/2 where you are not in a penalty phase. So that means for 83% of the life of your 401k plan, your money is subject to penalties if you do not follow the restrictions placed upon the use of your money by the government. Ever wondered why that is?)

* IRD taxation

* Transfers Taxable… No Step-Up in Basis

* Defers taxes to future uncertain tax rates. (You are paying an unknown amount of fees so someone can keep track of your money for govt. tax tracking purposes so they can charge you an ‘as yet unknown to you’ tax rate during your non-penalty withdrawal phase of 11 years.)

* Social Security carve outs (could make 85% of your social security TAXABLE – Double Taxation)

* Government Program Carve Outs.

* Trapped Assets – Defeats ‘Velocity of Money’  – Your money is in jail in a 401k (for you the owner of the money, not the manager of the money though who makes money moving your money whether you take a loss or not).

Step 2.

Up Front Tax Deferred Savings in a Qualified Plan.

Assume: Annual Salary                $62,000

Assume: Pre-tax Contribution     $ 2,000

– 30% tax bracket (combined state and federal) Adjusted Income           $60,000

– 30 year investment   Pre-tax contribution produces $600 per year tax savings each year for 30 years, for a total of $18,000 in tax savings.

Contributions of $2,000 per years for 30 years = $60,000

Assume the investment grows to $600,000 in 30 years.

Investment went in pretax and grew tax-deferred for 30 years.

What are the taxes in 30 years?

Step 3.

30 years later, were the initial tax-deferred savings worth it?   Assuming the investment grew to $600,000 in 30 years, and assuming the investor’s tax rate is still 30% . . . What will the taxes be on a lump sum distribution of $600,000?

Answer $180,000.

How much was saved in taxes by making the contributions ‘Pre-Tax’?

Answer $18,000

Conclusion: Our qualified Plan investor will pay 10 times as much in taxes as saved in taxes!!!

But he probably won’t want all $600,000 in one withdrawal …. so he will take $60,000 per year.

Now how much tax will he pay? 30% of $60,000 is $18,000 each and every year!

Our Qualified Plan investor will pay taxes equal to almost as much each year as he saved in taxes during the first 30 years of accumulation!!!

So I ask you again – How Much Tax Have You Really Saved When You Withdraw Your Retirement Income From Your 401(k) 30 years later?

Answer. NONE.

How much lost opportunity has it cost you to have your money tied up for 30 years?

Heaps, more than you probably know !!!

If you are interested in learning about a different way of financing your retirement please contact me today;

Jennifer Hansen

845-649-7487 or

Thanks to Jim K. for this enlightening look at the true un-value of investing in the 401(k).

Disclaimer – This information is for educational purposes only and is not to be construed as professional tax advice. Consult with your tax advisers before deciding on your retirement plan of action.

Click on illustration to enlarge

Below is a half hour video comparing investing in 401k to utilizing specially designed whole life insurance. It may take some minutes to download.

April 7, 2011 · Jennifer · No Comments
Tags: ,  · Posted in: 401(k), Insiders Look 401(k), RETIREMENT

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