Congress and Your Retirement Plan…

Your 401(k) may NOT be the Place to Save

When we work with families on their college planning campaigns, we focus not just on how to cover the cost-of-attendance, we also focus on preserving plans for retirement.

Most parents contribute to their employer-sponsored 401(k) retirement plan. Even when we show them a better way to save, they hesitate.

Most do so because they’ve been told from their first day of employment to save in their employer’s 401(k) plan. Many others do so because they’ve been enticed by their employer’s promise of “free money.”

While it may be highly advertised as the place to save, it’s likely those who suffered the market downturns in 1999-2001 and 2007-2009 might think otherwise.

Right now Congress is considering proposals to remove the tax advantages of your 401(k). They’re focused on the payroll tax deferred when you contribute salary to the plan. And, they’re considering a 15% tax every year on your annual gains.

Why would Congress consider taxing the growth of your plan?

In the words of famous bank robber Willie Sutton, “Because that’s where the money is!”

It’s estimated that the tax-deferred contributions made to 401(k) plans last year alone amounted to more than $90 Billion in potential tax revenue.

The government created 401(k) plans, IRAs, and 403(b) plans; they can and do change the rules any time they want.

Why contribute your hard-earned money to a plan over which you have no control, where you have little if any access to your money, and where your money is subject to the fluctuations of the stock market?

In fact, Ted Benna, the man credited with being the “Father of the 401(k)” saves most of his money in a much safer place.

Here’s one uncomfortable truth – deferring taxes may not be a good thing. Many retirees are complaining they are actually in a higher tax bracket in retirement!

This is happening for two reasons:

  1. Required Minimum Distributions (RMDs) that retirees must take, whether they need to or not, begin around age 70½ and push them into higher tax brackets.
  2. Many people are surprised to learn that their income from various sources can cause up to 85% of their Social Security income to be taxable.

Furthermore, based on our aging population and ever-increasing national debt, where do you think taxes rates are heading?

If you defer taxes and you’re successful in growing your nest egg, you’ll be paying higher taxes on a bigger number.

Even if Congress doesn’t take away the tax benefits of saving in a government-sponsored retirement plan like a 401(k) or IRA this time, they could well be successful the next time they consider where to drum up the cash they desperately need to fund the government.

So, where do you put your money? Perhaps a financial vehicle where:

  1. The vehicle is a private, “unilateral” contract – that means the company can’t change the rules unless you agree to it.  That’s the law.
  2. You can use the equity in your plan whenever and however you wish – no questions asked.
  3. The value of the asset has increased every single year for more than 160 years – including during the Great Recession and the Great Depression.
  4. You contribute after-tax dollars and you can access both principal and gains with no taxes due.
  5. There are no Required Minimum Distributions to push you into a higher tax bracket … and the income you take is not included when the IRS determines how much tax you’ll pay on your Social Security income.
  6. The plan and its growth are generally not reported to the IRS, which also gives you privacy.

Perhaps now is a good time to contact one of our Professional College Planners for assistance in reaching more of your goals and dreams – without taking any unnecessary risks.

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