Welcome back. In this episode, we're going to address the question, "Should I
participate in a 401K?" Well, the short sweet answer is "no". Now, people get
shocked when I say that. That's not a hard and fast rule as you're going to
see. But it depends. The problem is you're going to learn in this video this
particular educational episode that usually people get duped into putting
too much money into an IRA or a 401K. So, I'll explain why.
I'm Doug Andrew. And I've been a financial strategist retirement planning
specialist for more than 45 years. I've noticed that the government loves to tax
your money especially at the time in life when you can afford it the least.
But most people just sort of get duped (I think) into putting money into yet to be
taxed IRAs and 401Ks thinking that deferring saves them money. Now, there's a
few synonyms for defer. It also means to postpone and it also means to
procrastinate. When is procrastinating paying tax ever come out ahead for
people? Not very often. Way back when I was helping a lot of people look at
alternatives to 401ks and IRAs, I was talking about this very concept on an
interview in New York. Just a little while later, there is a cover story in
Time magazine titled why it's time to retire the 401K and do something better
instead. So, I'm going to share with you what I think is far better. But this is
because back then, in 2008 for example, this happened in 2001 to 2003 after the
9/11 terrorist attacks. But people saw their retirement savings nest eggs
dwindling in value 40% twice in the decade from 2000-2010. That's a big issue market
volatility. But I think the number 1 reason why you shouldn't participate is
most people are not in a lower tax bracket when they retire. So what was
that all about? People put their money aside into something that's going to grow
to this big nest egg (hopefully) for some future perceived unknown advantage. And
then withdraw your money, when most people believe that down the road taxes
will be higher, that doesn't make sense. But in this article, it said the 401K is
a financial flop. A rotten repository for our retirement reserves. I hadn't used
that strong of language in that interview in New York just a few months
earlier. Well, I also found a that other articles would come out in
the Wall Street Journal about how to do something better than a 401K. In fact, I
think it was in 2017 in January the Wall Street Journal came out with a headline
"Why the original champions of the 401K lament the day they ever came up with
that idea?" Because you're not in a lower tax bracket. You really didn't save taxes
at the end of the day. So, let's talk about why that is the case because as I
mentioned many times, when people come to me with yet to be taxed IRAs or
401Ks I usually ask "Were you planning your retirement or Uncle Sam's?" It's
because when people retire.. If they have a million-dollar nest egg, they think
that's all their money. No. Only about 2-thirds of that is their money. See,
the government, Uncle Sam has a permanent tax lien on your IRA or 401Ks. And
that's why I always would ask my clients, "My heavens! Are you planning your
retirement or Uncle Sam's?" So, let's talk about the pros and the cons, okay?
Qualified plans are qualified with who? Okay? The government, okay? In the Internal
Revenue Code. And traditional accounts like IRAs, 401Ks have pros and cons. But
let's look at the cons first of all. Sometimes, I will... "Hey, if pro and
con are opposite, maybe Congress is the opposite of progress." I think that's true.
When they get together, the tax revenuers. Now, over here, what are the pros of
an IRA or 401K? You get tax deductible funding. In an IRA, you get to deduct it.
With a 401K, you put in pre-tax dollars. So, we have this illusion. "Ooh! I have more
money working for me." No, it doesn't matter what it grows to. The government
gets a third of every dime. And they're using you as their savings bond.
They get 1/3 of everything you're going to make. So, what a great partnership is
that. You get tax deferred growth of your money. And you think, "Oh, that grows
tomorrow." Yeah. But you don't choose investments based upon which ones grow
the most. You use the investments that will generate the most at the time in
life your need the money in the most. After taking
into consideration, taxes and inflation. Now, sometimes employers will offer
matching. So, you might have possible matching. So, you're putting a dollar, your
employer matches 50 cents on that. You got a buck-50 working for you.
"Oh!" All they did was cover your tax Because you pull out that $1.50 and
you pay a third in tax. Now, you still have you at all. So, that's nice of your
employer to do that. The big problem that I have seen my entire career is people
put in more than they're being matched. In other words, if your company matches
you a 50 cents up to the first 6%, I see people putting in the
maximum up to 9, 10 percent of whatever they can. No. I wouldn't do that.
There's no advantage to doing that. I would only participate up to what they
match you. And many times, not even take advantage of a match if the rate of
return on that portfolio at your employer and what you're doing is not
that great. The match isn't worth it. But a match just covers your tax. So, what are
the cons? It's fully taxed as you use it in retirement. Every time you pull out,
shows up on your 1040 tax return. You must use it up. What does that mean? See,
if you don't start withdrawing money at least by age 70 and a half,
because the government --Uncle Sam has been waiting for that tax revenue. And if
you don't start taking out what they require, (it's called a required minimum
distribution based on your life expectancy) there's a 50% penalty. I said,
five, O. 50%. If you're supposed to pull out 50,000 out of a
million dollar nest egg and you don't, the penalty is $25,000 on top of the tax.
You must use it up. And the remainder that is in your account when you die is
potentially taxed twice upon passing to non spousal heirs. Your spouse can get it
but they're not getting it at tax-free. They have to pay tax on it when they go
to use it. Same thing with your children. But if you have an estate tax, it can be
potentially taxed twice. So, I do not feel that the pros are worth the cons. There
are far better way to save and accumulate money for
retirement. So, I'm going to share a story with you. So, you're ready for a story? You
know, oft times, I would tell my clients a little ditty, good, better, best. Never let
a rest a good gets better and better gets best. I would say that an IRA or
401K used to be a good way to go. But a far cry from the best way in my opinion.
A Roth in other episodes, I explain why a Roth is a step in the right direction.
It's probably better than a traditional IRA or 401K especially if you think
future tax rates are going to be higher. I'll take a Roth any day. But the best is
not an IRA or 401K or a Roth. I've never owned an IRA or 401K or a Roth. Never
will. My favorite vehicle is what I refer to
as the laser fund and that's why I would encourage you watch the episode where I
talk about that in several different educational videos. But let me give you a
story about 2 school teachers. Both the husband and the wife are schoolteachers.
And they came to me at age 60. So, over age 59 and a half, you can access money
out of your IRA or 401Ks. They had some 403B's and tax sheltered annuities. And
so, they thought, "Well, we can't get by on our pension. Our pensions only, you know,
60% of what we were earning the last few years we taught school." And so, they
wanted to be responsible. They socked away money. This couple had a quarter of
a million dollars at that time in yet to be taxed 403Bs and 401Ks. And their
advisor said, "Well, do you need the money?" "No, we don't need the money."
"Oh, keep deferring. Keep putting it off until you're 70 and a half." Well, that
would have hopefully doubled their quarter of a million to a half-million.
They were averaging about 7%. I said, "No, no." You're just continuing to
postpone. I said, "Let's get the money out." The tax is over and done with. Well, we
don't need it. What does that have to do with it?
Let's reposition it to be tax-free. So, this couple, we withdrew about 60,000 a
year. Because I showed them how much they would pay in tax if they let it continue
grow tax-deferred and then took out the required minimum distributions, they were
shocked. If taxes never went up, they were going to pay over
a quarter of a million dollars in tax. The rest of their life expectancy. They
will what? "We're going to pay as much in taxes we currently have?" I go, "Yep, because
you're just going to string it out." Let's get it over and done with. I showed them
by taking out 60,000 a year for 5 years. "Oh, yeah. We got to pay the tax. We
don't have to spend the money. Let's reposition it into something tax-free
from now on." Oh.. That interested them. And so, they paid $12,500
in tax over 5 years. So, we lowered the tax from 250
thousand down to 60 thousand. And then they said do you have
any other strategies. Well, in other episodes, I'm a tax strategist and so
we resurrected some deductions that they had been killing for several years
paying down their house the wrong way. Paying off rental income real estate the
wrong way. And we were able to lower the tax from 60 down to 20 thousand.
We did one other strategy and we eliminated the tax. We went from
250,000 in taxes down to 60 down to 20 thousand
down to zero. After 5 years, they said, "Oh, My heavens. We now can enjoy
retirement." We tripled their nest spendable retirement income. And they
were able to still have a half a million in 10 years and it was tax-free.
Generating about 40 to 50 thousand a year of tax-free income. We have done
this many, many times. I've helped many clients save a quarter of a million, a
half million. One couple, we save 1.2 million. So, I would encourage you to
rethink your thinking. In short, is a 401K a good idea? Should you participate? No.
Except maybe up to a match. Reposition your savings into something is tax-free.
but if you've painted yourself into a tax corner, I want you to watch other
episodes on how to strategically get that money out. If this has piqued your
interest and you would like to learn more, be sure to watch this episode here
about how to protect yourself from taxes. And then there are some resources there
where you can get a free copy of one of my
books or look at some other masterclass videos to empower you to figure out how
to do something better than a 401K.