Protect Your Retirement: Why You Shouldn't Invest Your 401(K) This Way

Investing in a 401K is pre-tax, meaning you defer paying tax now but pay tax later. If you invest $1,000 in a 401K and let it grow to $10,000, you would rather pay taxes on the smaller amount or the larger amount? The smaller amount, of course. It’s almost certain that you will pay more in taxes when you pull the money out (when you really need it). With a 401K, you’re paying someone else to manage your money, which costs a fee. You need a better tool than a 401K. Liquidity (access to your money) is important. Withdraw any 401K funds before 59 ½, and the IRS penalizes you by taking a 10% tax on top of income tax.

Tax implications

Investing in a 401K is pre-tax, meaning you defer paying tax now, but pay tax later. On the surface, this may sound like a smart move, but let's do the math.

If you invest $1,000 in a 401K and let it grow to $10,000, would you rather pay taxes on the smaller amount or the larger amount? Of course, the smaller amount!

It’s almost certain that you will pay more in taxes when you pull the money out (when you really need it). With a 401K, you’re paying someone else to manage your money which costs a fee.

Withdrawing any 401K funds before 59 ½, and the IRS penalizes you by taking a 10% tax on top of income tax. This creates massive opportunity cost. You’ll need to come up with extra cash (or pay the penalty) to:

• Buy a house
• Pay for your child's college
• Start a business
• Pay for your child's wedding
• Pay for your own retirement

The 401K was created in 1978 to solve a problem for companies (not employees). It shifted the risk from the company to the employee. The 401K isn’t inherently good or bad, it’s a tool to get you to retirement.

Your plan may benefit you by allowing you to save a large amount of tax-advantaged money compared to other accounts. Your plan may provide special investments you won't have access to as a retail investor.

High management fees

Investing in a 401K is pre-tax, meaning you defer paying tax now, but you pay tax later. This may sound like a smart move on the surface, but let's do the math. If you invest $1,000 in a 401K and let it grow to $10,000, would you rather pay taxes on the smaller amount or the larger amount? Of course, the smaller amount! It’s almost certain that you will pay more in taxes when you pull the money out (when you really need it).

With a 401K, you’re paying someone else to manage your money which costs a fee. Pension plans used to be abundant. Work for a company, pay into their pension plan, the company guarantees you’re going to have a retirement. Today, very few companies offer this. Why? Because it requires the company to take on the risk of managing that money.

In 1978, the Revenue Act was implemented to solve this problem for companies (not employees). It shifted the risk from the company to the employee. The 401K was created. The 401K isn’t inherently good or bad, it’s a tool. A tool to get you to retirement.

After all, it’s the journey you should be enjoying… not the destination. You need a better tool than a 401K. I have a whole toolbox to share with you. The Right Now: Liquidity (Access to YOUR money) Withdraw any 401K funds before 59 ½, and the IRS penalizes you by taking a 10% tax on top of income tax. So basically, YOUR hard-earned money is locked up unless you want to pay the penalty. This creates MASSIVE OPPORTUNITY COST. You’ll need to come up with extra cash (or pay the penalty) to:

Limited liquidity

Withdrawing funds early can be costly and taxing. If you invest $1,000 in a 401K and let it grow to $10,000, you would rather pay taxes on the smaller amount or the larger amount? Of course, the smaller amount! It's almost certain that you will pay more in taxes when you pull the money out (when you really need it).

Pension plans used to be abundant but very few companies offer this now. Today, pension plans are rare because they require the company to take on the risk of managing that money. In 1978, the Revenue Act was implemented to solve this problem for companies (not employees). It shifted the risk from the company to the employee. The 401K was created as a tool to get you to retirement.

401K plans can be costly and taxing. Withdrawing funds early can be costly and taxing. If you invest $1,000 in a 401K and let it grow to $10,000, you would rather pay taxes on the smaller amount or the larger amount? Of course, the smaller amount! It's almost certain that you will pay more in taxes when you pull the money out (when you really need it).

Opportunity cost

Investing in a 401K is pre-tax, meaning you defer paying tax now but pay tax later. This may sound like a smart move, but let's do the math. If you invest $1,000 in a 401K and let it grow to $10,000, would you rather pay taxes on the smaller amount or the larger amount? Of course, the smaller amount! It's almost certain that you will pay more in taxes when you pull the money out (when you really need it).

With a 401K, you're paying someone else to manage your money which costs a fee. Pension plans used to be abundant, but today, very few companies offer this because it requires the company to take on the risk of managing that money.

The 401K was created in 1978 to shift the risk from the company to the employee. The 401K isn't inherently good or bad; it's a tool to get you to retirement.

Liquidity is key. Withdraw any 401K funds before 59 ½, and the IRS penalizes you by taking a 10% tax on top of income tax. This creates massive opportunity cost. You'll need to come up with extra cash (or pay the penalty) to:

• Pay for your child's college
• Pay for your parent's nursing home
• Pay for your wedding
• Pay for your dream vacation
• Pay for your dream home

Your hard-earned money is locked up unless you want to pay the penalty. This creates massive opportunity cost.

Risk transfer

In 1978, the Revenue Act was implemented to solve this problem for companies (not employees). It shifted the risk from the company to the employee. The 401K was created. The 401K isn’t inherently good or bad, it’s a tool. A tool to get you to retirement.

Today, very few companies offer this because it requires the company to take on the risk of managing that money. Pension plans used to be abundant. Work for a company, pay into their pension plan, the company guarantees you’re going to have a retirement.

After all, it’s the journey you should be enjoying… not the destination. You need a better tool than a 401K. Liquidity (Access to YOUR money). Withdraw any 401K funds before 59 ½, and the IRS penalizes you by taking a 10% tax on top of income tax.

So basically, your hard-earned money is locked up unless you want to pay the penalty. This creates a massive opportunity cost. You’ll need to come up with extra cash (or pay the penalty) to...

Investing in a 401K is pre-tax. Meaning you defer paying tax now, but you pay tax later. If you invest $1,000 in a 401K and let it grow to $10,000, would you rather pay taxes on the smaller amount or the larger amount? Of course, the smaller amount! It’s almost certain that you will pay more in taxes when you pull the money out (when you really need it).

Frequently asked questions