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:
|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of state income tax) is generated in a tax-deferred retirement account, they lose their special tax status and, when withdrawn from the account, are taxed as ordinary income.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: firstname.lastname@example.org. Follow TheStreet on Twitter and become a fan on Facebook.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV