After the US Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, the rules of money for people have changed. From then on, retirees could no longer depend on their employers to provide for them even when they are not working. Instead, retirees become forced to enter the stock market via the new defined contribution pension plans like 401(k). Today, many might think of the 401(k) as an ingenious financial creation. To me, it is a cunning lie to dupe the financially ignorant. To know more, please read on!
As many of you know, one big benefit of the 401(k) plan is the fact that it offers you tax advantages where you only pay taxes when you withdraw the money. While it may seem like a benefit to some, I believe this to be a fatal flaw and drawback because employees will most likely become taxed at higher tax brackets upon withdrawal. This is because their income would have increased by the time of withdrawal and this rise in remuneration suggests a higher tax bracket. Now, do you think that leaving your money to become taxed more to be a brilliant move? I suggest you think again if you say yes.
Moreover, 401(k) exposes people to estate taxes if they only accumulate but don't use the money. Here, when the money is passed to heirs, income tax and estate tax will eat the retiree's hard-earned money alive. Now, if you really want your descendants to be financially secure, why not concentrate on building assets and making use of tax advantages? I believe you can definitely do it better than 401(k).
Furthermore, 401(k) allows no exit strategy because the penalty and tax consequences make it hard. As a result, money becomes underutilized and less productive, leading to lower investment yields. In contrast, the government and financial giants of Wall Street benefit from your tributes of taxes, fees and commissions.
In addition, 401(k) is subject to change and regulations by the government because it is held in trust by custodian on your behalf. With this, the investor has little or even no control over the terms and conditions which are the most important aspects of investments. To make things clearer, let me illustrate this with an example below.
For house at $250,000, a 30 year loan of $1,700 per month at 7% interest rate is found while your budget is $1,400 per month. Here, if you develop relationship with the owner, she tells you that she only owns $100,000 with payment at $800 per month and she is willing to work with you on terms via lease/option agreement.
After negotiation, she agrees to $50,000 down payment and lease payment of $1,300 per month for 2 years. With that, you save $400 per month and she gains $500 per month. This example here shows the power of building relationships and controlling terms. However, in the case of 401(k), I believe investors would find it hard to develop a relationship with the government or even have the ability to challenge the government by changing the terms.
Hence, in conclusion, given all these dangers lurking in 401(k), I do not think that it is a potion to greater financial health. Instead, investors ought to educate themselves well financially and seek to create value. This will definitely bring them more wealth than 401(k).
About The Author:
Ong Xun Xiang invites you to visit http://electricalpowersaver.blogspot.com/ if you want to enjoy big savings in your electricity bills. Cutting unnecessary expenses away from your bills is definitely a good investment as it creates more money available to work for you. Do you believe in offering others free money or in using them for your own good? The decision is in you!
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