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 choice between a Roth and a 401(k) plan, consider what your objective is in saving money for your future. If you are trying to accumulate enough money to live on, a 401(k) may not be the best choice. That's because the better you do, the more taxes you pay. In fact, you may end up paying back more in taxes than you've saved.
What are you always being told about qualified plans and retirement in general? You're told that you'll be in a lower tax bracket, right? The question is, is that true? If so, then you are going to be making less money than before you retired. You can't expect to do well in your investments and pay less in income tax. If you do poorly, you could end up being poor by the time you retire due to inflation. Does that sound like your ideal retirement?
Of course, the other most popular option is the Roth. This plan works a little differently than a traditional qualified plan. You contribute after tax dollars and when you retire you don't have to pay tax on any of the gains. It's a good deal, except for one thing. You can't contribute anywhere near the amount you'll probably need to save. This can be problematic since most people expect unrealistic rates of return on their investments...the result will be a lower than necessary savings rate.
What it ultimately comes down to is: which qualified retirement plan is the best? But, do you need to use a qualified plan? Most mutual fund investors earn less than the rate of inflation according to DALBARinc.com. In qualified retirement plans, the bulk of your money will probably be invested in - you guessed it - mutual funds. The inherently high fees in some of these plans will further drag down your returns.
So, what can you do instead? Many families and businesses have turned to private insurance contracts. High cash value life insurance can yield between 5-6% tax-free over your lifetime, the cash values are guaranteed, and the death benefit advances your future expected savings to your family if you are unable to complete your plan due to death regardless of how much cash has actually been built inside the plan.
If you are making a choice between a Roth and a 401(k) plan, consider what your objective is in saving money for your future. If you are trying to accumulate enough money to live on, a 401(k) may not be the best choice. That's because the better you do, the more taxes you pay. In fact, you may end up paying back more in taxes than you've saved.
What are you always being told about qualified plans and retirement in general? You're told that you'll be in a lower tax bracket, right? The question is, is that true? If so, then you are going to be making less money than before you retired. You can't expect to do well in your investments and pay less in income tax. If you do poorly, you could end up being poor by the time you retire due to inflation. Does that sound like your ideal retirement?
Of course, the other most popular option is the Roth. This plan works a little differently than a traditional qualified plan. You contribute after tax dollars and when you retire you don't have to pay tax on any of the gains. It's a good deal, except for one thing. You can't contribute anywhere near the amount you'll probably need to save. This can be problematic since most people expect unrealistic rates of return on their investments...the result will be a lower than necessary savings rate.
What it ultimately comes down to is: which qualified retirement plan is the best? But, do you need to use a qualified plan? Most mutual fund investors earn less than the rate of inflation according to DALBARinc.com. In qualified retirement plans, the bulk of your money will probably be invested in - you guessed it - mutual funds. The inherently high fees in some of these plans will further drag down your returns.
So, what can you do instead? Many families and businesses have turned to private insurance contracts. High cash value life insurance can yield between 5-6% tax-free over your lifetime, the cash values are guaranteed, and the death benefit advances your future expected savings to your family if you are unable to complete your plan due to death regardless of how much cash has actually been built inside the plan.
About the Author:
Author: Only so much information can be covered in one article. If you would like more detailed information about any aspect of personal financial planning, please visit David's website.
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12:35 AM
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