Stop Saving Money Into a 401(k)…

Okay, I’ve said this before and I’ll say it again: Stop saving money into a 401(k). Why? I’ll use my friend who recently confessed that he just paid this year, the most income tax he’s ever had to in the last 30 years to try to explain.  He said his house is paid off, so he gets no interest deduction.  His children are married and gone so there’s no tax deductions there.  He is just out of any tax deductions.  To top all that off, he has some retirement money in a 401(k) and at his age of 72, he is required to take out 5 percent each year or pay a 50 percent tax penalty. Of course, when he withdraws this money he must pay income tax on  it (because he deferred paying it all those years he was building it up). This forced withdrawal increases his income to the point that it causes his Social Security benefits to be included for tax purposes. Because of this, he lost another $5,690 this year.  The way the tax system has intertwined 401(k) deductions, taxes, withdrawals, etc. with Social Security income gives me one more reason to urge serious thought about just how sound the advice is to invest a bunch of money in a 401(k). Tax complexities seem to negate any worth they may have.
If you are dead set on saving using a 401(k), then be sure you ask about whether your employer matches funds you deposit. If your employer doesn’t offer a match, run away! Now! As fast as you can and look at other options for building retirement. Okay, if you must invest in a 401(k) and your employer offers a match, at least put enough money into the account to qualify for the match, but please, please, please don’t look at a 401(k) as THE way to save for retirement. It simply isn’t doing the job, and we can see that now after 30 years of playing around with them.
 Seriously, don’t put your hard-earned money into a tax-deferred account, only to find at retirement you will pay out tons of taxes.  In future articles I will identify where to put your money to keep it safe, vibrant, and free of any more tax.