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Why You Need To Get Rid Of Your 401K

| January 25, 2014 | 0 Comments

There are plenty of reasons to avoid investing in a 401K, especially if your company doesn’t match your investment: management fees, lack of flexibility, for example.

But the reason at the top of the list is future tax increases.

Let me ask you a question: Do you think taxes are going to go up or down in the next twenty years?

Before you answer, go to usdebtclock.org and take a quick look at our national debt. As of 2013, our U.S. national debt was $17.1 trillion. If you add in state and local debt and divide per each U.S. citizen, you get about $190,000 per citizen. That’s right. The United States government owes nearly $200,000 for every one of its citizens.

Now, compare that to how much the average family has saved, about $6,500. And that’s per family, not just per person. If you think that’s bad, look at Japan, the U.K., France, Italy, Greece, and even Germany. Those countries have it even worse.

It’s difficult to convey in words just how bad the situation is that our government has put us in.

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The Reality Is Taxes Will Go Up

The question, then, is how is the government ever going to pay off that debt? The only thing they can do is reduce spending or increase taxes. If you’re like most of the people I know, you probably don’t see the government reducing spending. No matter which party is in power, each seems bent on outspending the other.

The reality is that a major increase in taxes in the future is almost inevitable.

Raising taxes even makes sense historically. We may complain about how high taxes are, but the truth is that tax rates are historically low. In 1944, the income tax rate on the top bracket (people who made over $200,000) was 94 percent. Can you imagine that? If you made $200,000 that year, the U.S. Government would only allow you to go home with $12,000 of that. However, that’s not the only time taxes were high. In the 1960s, 70s, and 80s, the top paid 70 percent or more.

The truth is, we could soon be moving back to that range.

Higher Taxes Could Ruin Your Retirement

This might not be a problem now, but what if taxes are higher when you retire? Are you okay with Uncle Sam taking 94 percent of your hard earned money? What if you’re currently calculating your retirement plan with a 25 percent tax rate? Not too big of a deal. Compared to the top tax bracket in 1944, you’ve hit the jackpot.

However, when you want to take your money out, what if the tax rate has been raised to over 50 percent. How would that affect your future? How would an extra 25 percent haircut on your savings change your lifestyle?

The Solution: Pay Taxes NOW

If taxes are going to be higher in the future, you should always try to pay taxes on your wealth now, not later. We need a strategy that pays tax now on the seed while taxes are still historically low, so that when you take your money out to finance your future, you won’t have to pay any tax.

What are some investments that allow you to pay taxes now, protecting your investment in the future?

  • Roth IRA
  • Annuities
  • Investment Grade Life Insurance (IULs)
  • High-Growth, Low-Income Stocks

If your company has a matching program, it still makes sense to invest the minimum amount into your 401K to get the match. Free money is free money! But to avoid getting your retirement devastated by Uncle Sam, avoid that 401K program!

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Category: Financial Planning

Beau Henderson

About the Author ()

Beau Henderson is a financial advisor, author, coach, radio personality, and CEO of RichLife Advisors. He has helped over 3,000 clients to not just improve their relationship with money, but to live the life of their dreams. For more tips on how you can apply the principal of wise stewardship to your everyday life, check out Beau’s newest book, "The RichLife - 10 Investments for True Wealth" at http://www.richlifeadvisors.com/.

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