There are now about 30 million employer sponsored retirement plans out there, with $7.7 trillion in assets.
If you work with clients on retirement planning, chances are that most of those clients have been told how thrilled they should be with their 401(k) plans. (Or their 457 plans, or their 403(b) plans.)
The truth is: There are almost $8 trillion in assets inside plans that stink.
Here are six stinkmakers that your clients need to understand.
- Taxes that are “deferred” eventually come back.
One of the main “benefits” marketed by 401(k) providers (and accountants looking for a better current-year tax return) is the participant’s ability to defer income.
A very common saying is, “Contribute $10,000 to the 401(k) at work. You’re not paying for it; Uncle Sam is.”
It’s true that a person making a $100,000 salary and contributing $10,000 pre-tax into a 401(k) has lowered taxable income to $90,000 this year, notwithstanding other deductions.
However, that deferral creates a corresponding compounding tax liability.
Qualified distributions in retirement will be subject to ordinary income tax. Your client will have to pay taxes not simply on the contributions, but also on the investment gains.
- But your clients will retire in a lower tax bracket.
Or will they?
Most of my clients want to maintain, if not increase, their lifestyle in the Golden Years. This comes at a cost.