401K Contribution Limits Raised for 2019- Jerry Fetta
In this Show
Should You Contribute More To Your 401k?
By Jerry Fetta
This week it was announced that 2019 401k and IRA contributions would be raised. This is typical to have happened every few years. 401k contributions were raised from $18,500 per year per person to $19,000. IRA’s remain the same. Maximum annual contribution for a defined contribution plan was increased from $55,000 per person per year to $56,000. 401k catch up contributions remain the same. I want to share this today because it is relevant and it brings up the topic of whether or not someone should be using these financial tools.
What is the 401k? The 401k is a defined contribution retirement plan that invested in the 1980’s. The inventor of the 401k is named Ted Benna, and he designed the plan as a private use plan for the employees of his company. There were no fees and Wall Street was not involved. This plan was approved by the IRS and quickly taken up by companies as an alternative to the pension and touted by Wall Street as a lucrative business plan to increase fees without guaranteeing performance.
Today the 401k is in widespread use! As soon as a person begins established employment, they are given the opportunity to contribute to a 401k. In fact, in almost every case an employer will even match the contribution. It seems like a good idea right? The thought of putting aside a few hundred dollars per month, getting free money from your employer, and then not thinking about it for a few decades while it turns into millions of dollars. Sounds almost too good to be true, doesn’t it? Well, you’re right! It is too good to be true.
I believe the 401k is one of the worst investment decisions a person could make. I want to explain why.
First, by putting money into a 401k, you are choosing to have the IRS tax your money as income, rather than a long-term capital gain. What’s the difference? On a long-term capital gain, the highest tax rate possible is 20%. On income, the highest tax rate possible is 40%. So let me ask you, would you rather pay 20% in taxes are 40% in taxes?
But what about the deduction? That’s a fair question, but the deduction doesn’t actually avert taxes. It simply defers them. Before I explain the math on this, just ask yourself 1 simple question. Why would the IRS offer you a way to get out of paying taxes if they didn’t believe they could recoup them in excess from you down the road? Let’s not be naïve. If you earn $5000, you may pay roughly 15% in federal taxes. That would equate to roughly $750. Now, let’s say you put that money into a 401k instead. Great! You saved $750. But let’s do the math on what taxes would be in the future. In 1913 the highest income tax you could pay was 0% income tax. In 2018, the highest income tax you could pay is 40%. That means taxes have gone up by 3.57% on average, per year. So if you let your $5,000 sit in the 401k for 25 years, history tells us that at a 3.57% increase, your tax rate would go from 15% to 36%. Instead of paying $750, you’ll be paying $1800. Not to mention that your 401k money grew right? If it grew at a rate of 8% per year for 25 years, your $5,000 is now worth $36,700. This means you’d pay at least $13,212 in taxes on this money if taxes stay as low as they have over the last 100 years. Is it really worth saving $750 today so that you can pay potentially $36,000 in taxes when you’re 60?
Okay so the deduction isn’t a good idea, but what about the match? Still not a good idea. Why? When surveyed, employers admit that every $1 they match in your plan, equates to a $0.99 reduction in your wages. You aren’t getting “free money”. You’re having your paycheck reduced so your employer can put it into the 401k instead and avoid payroll taxes. Yes, that really is their benefit for doing it. It also causes you to want to work for them longer. Not to mention, you are paying a 1-2% annual fee in your 401k plan. Even after you stop working there, you will still end up paying this fee. The fee you pay will equate to more paid in fees than any amount of “free money” you got from your employer. You’ll never actually see that money to benefit from it.
What about if you do a Roth contribution? Then it’s not so bad, right? Well, it still is actually. You lose flexibility on your funds as soon as you put them into the 401k. Meaning, you don’t get to pick what you want to invest in. You are limited to whatever your 401k plan and company allow you to pick. This will be a limited list of funds, owned by Wall Street or a list of target date funds that are generic and not managed for you personally. Did you know if you contributed the same money to a High Early Cash Value Dividend Paying Whole Life Insurance policy you would get the same tax free benefits of the Roth 401k, the same kind of growth potential, and remain in full control to use and invest the money as you personally see fit with no restrictions?
The reality is, most people invest in the 401k for “tax benefits” when there really are none. Most people invest in a 401k for their company match, which is a wash after fees. The rest of people invest in the 401k because they wouldn’t save money otherwise, which can be better accomplished with life insurance.
The 401k serves 2 purposes.
#1 to increase the tax revenue of the IRS. They are basically allowing you to finance a tax break by paying your taxes, plus interest later.
#2 to increase the fee revenue of Wall Street. They are the ones charging the fees in the plan and providing the funds. The growth of the funds are not guaranteed, but the fees are.
If you understand what I’m saying and you would like to get out of your 401k, I want to offer you a copy of my new book How To Create Wealth. How To Create Wealth provides more information on the pitfalls of the 401k, why it is a bad idea, and what to do instead. This book will give clarity on your finances so that you can create wealth now and enjoy life sooner. Click here to get your copy!
Own Your Potential,
Grant Cardone Certified Coach
Jerry Fetta helps his clients build wealth so that they can eradicate poverty in their own lives and own their potential.
He believes scarcity and abundance cannot co-exist and that the way to end poverty is to help you build wealth.
You were not created to spend 40+ hours per week serving the 40-year-to-life sentence trading your precious time for money just to live in mediocrity.
However, the truth is that time and money must be exchanged. It just doesn’t need to be you making the exchange.
Jerry helps his clients create wealth that exchanges time and money on their behalf. The only way to do this is to make more money, keep it, and then multiply it.
He has helped clients double their income, save $100,000 tax-free, and secure 8-12% fixed annual returns on their assets.
To get started, go to www.WealthDynamX.com/contact
Wealth DynamX Home
Wealth DynamX TV