This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

401(k) Contributions Are Not Always Good

LOS ALTOS, Calif. ( TheStreet) -- Someone asked why a friend of theirs who is a 401(k) participant has stayed auto-enrolled at 3% instead of maxing out their contributions.

The stereotype is that everyone should max out their 401(k) contributions, and they certainly have benefits:
IRA
Generally the reasons against a 401(k) are applicable only to the wealthy, but the middle class should take note now.
  • Asset protect from lawsuits, depending on complex rules.
  • Encouragement to avoid spending savings.
  • Encouragement to save for retirement.
  • Shifting income into future years, when retirees are likely in a lower tax bracket.

But hear the other side of the story. There are reasons against 401(k) contributions:
  • Retirement accounts create problems, including double taxation at up to 85% for people wealthy enough to have to pay estate tax.
  • People who want to start a business or buy a home -- for which large down payments may be required in today's tight lending environment -- need access to their funds.
  • If long-term capital gains or U.S. Treasury income (U.S. Treasury interest is free of state income tax) is generated in a tax-deferred retirement account, they lose their special tax status and, when withdrawn from the account, are taxed as ordinary income.
  • Capital gains taxes are waived by using basis step-up at death for assets in a taxable account, but not in a retirement account.

Of course if someone can get an employer match, they should participate and get it. Probably the simplest explanation why someone contributed 3% is that they were too poor to save; for a person in a 15% tax bracket, the tax savings is not that appealing as simply getting enough current spendable income to buy the basic necessities.

Generally the reasons against a 401(k) are applicable only to people wealthy enough to pay estate tax. But with inflation and a need to raise taxes it is possible that in a few decades people in the middle class will come close to paying estate taxes. That would depend on how long they live and what excessive medical costs they encounter, assuming Medicare in the distant future has huge "means testing" fees.

>To submit a news tip, email: tips@thestreet.com.

Follow TheStreet on Twitter and become a fan on Facebook.
Donald Martin, CFP and a member of NAPFA, an organization that promotes fee-only finance advice, founded Mayflower Capital in 1993. The company is a fee-only financial planning and investment advisory firm. He has been employed in the financial services industries for 31 years.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $126.44 0.00%
FB $87.28 0.00%
GOOG $523.40 0.00%
TSLA $280.02 0.00%
YHOO $39.38 0.00%

Markets

DOW 17,730.11 -27.80 -0.16%
S&P 500 2,076.78 -0.64 -0.03%
NASDAQ 5,009.2140 -3.9090 -0.08%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs