Misguided Wisdom

Don’t Limit 401K Deductions to the Amount Matched…I found the following sage advice in a local newspaper:  Even though the company matches only part of the 401k contribution, it is to your benefit to put the most away in your 401k plan as you can, since 401k plans are an excellent way to save for retirement.  The author of the article went on to profess that often many investors contribute only up to the company match within their 401k plan, and do not take advantage of their 401k plan if the company does not match, and he states that this is a mistake.  He finalizes this train of thought by stating that with a 401k plan, an investor receives a double tax benefit.  Not only is someone not taxed on contributions into a 401k plan, but all the income continues to grow on a tax deferred basis.

Half the Story These are the types of planning strategies we are presented with all the time.  It is “surface thinking” at its simplest.  I kept looking for the rest of the article that would tell the whole story and the truth.  This was another example of someone deciding that the public didn’t need to know the “rest of the story.”  They decided that it was not important to discuss the taxation issues of these strategies with the public.

The article should have concluded as follows:  Although accumulating money for retirement should be everyone’s goal, there are things that should be taken into consideration.  A qualified plan simply defers the tax, as well as the tax table, to a later date.  The assumption that you will retire to a lower tax bracket than the tax bracket you were in when you deposited the money if flawed.  Studying the country’s demographics, debt, and the history of the federal marginal tax bracket could lead you to the conclusion that is very possible that you may retire to a higher tax bracket.  If that is so, then the strategy of using a 401k as your main retirement savings vehicle may be a losing one.  You are at the mercy of the Federal Government.  When was the last time the government allowed you, as this planner cited, a double tax benefit without their ability to recoup those taxes, if not more, at a later date?

This article left a lot of questions unanswered.  Failure to mention the effects of taxation on this 401k money could be considered an omission of the facts.  Unintended consequences could result if you feel that taxes will go up in the future.  I’m not saying all retirement plans are bad.  I feel that when loading up or overloading qualified retirement plans and exposing yourself to future taxation, whatever level that may be, you should think at least twice about it.  Once again, whose future are you financing, yours of the government’s?A study of personal preparedness for retirement in the U.S. finds 86% of Americans do not have any idea about how much retirement income they will have.

Join me this and every Saturday morning at 11 AM for "It's Your Money," part of Coaches Corner, Saturday Morning Street Smarts on Newstalk radio WBLF 970 AM and FM Talk 103.7.  Call our office at 814.867.5745 or visit our website at