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.
- 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of state income tax) is generated in a tax-deferred retirement account, they lose their special tax status and, when withdrawn from the account, are taxed as ordinary income.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.