Friday, March 20, 2009

One Reason to Avoid 401Ks: Taxes

One of the pitches for 401Ks is that it they take "pre-tax" money out of your paycheck for investment. This money then "grows" (ha-ha) tax-free, and isn't taxed until you take it out at retirement.

The big assumption here - other than your money will grow - is that when you take it out you will be living under a lower-tax bracket. 401Ks let you avoid "high" taxes now so you pay them when you have "low" taxes at retirement.

With the current budget deficit, which will only grow higher with new spending programs and gazillions of dollars flowing into new spending, there is nooooo way that taxes will be lower in the future, even if you ARE making less in retirement. So 401K programs allow you to avoid lower taxes now so you can pay higher taxes in the future.

About the only thing that might make it worthwhile is if your employer has (or still has) a match, in which case if you invest up to the match you might still be ahead in the future. Otherwise it may make sense to avoid 401Ks, bite the bullet on the lower taxes now and invest it in an "regular account" (which will also allow you to have access to it unlike a 401K).

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