A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes are not paid until the money is withdrawn from the account usually until you are 59 1/2 years old. What happens when you need the money now? Well I am sorry to say but you will be penalize with 10% tax on top of the income tax when you pull it out depends on how much money you will be taking out. There are some special provision when you are age 55 that will allow you to withdraw money without any tax penalty. Below is the income tax bracket that I got from wikipedia in case you want to know how much tax you will be paying when you decide to withdraw all your hard earned money when you retire.
THE UGLY TRUTH!
I personally believe that 401(k) lost it's reputation back in 2007-2008 when everything went down almost to the drain. It was called the "Global Financial Crisis" and is the WORST financial crisis since the Great Depression in 1930's. Question is, what if it happens AGAIN?what if you depended 100% of your retirement from it and loose almost half of it from the recession?your answer is probably "I don't know".
Now let's be realistic, what can a 401(k) do when you are in a desperate situation? Most people do not have any money saved up for emergency matters like blown tires, broken down car, money to travel home in case of a member of your family passed or gets sick. 401(k) will allow you to make a loan from your fund at a low interest but you will HAVE to pay it back within a month or two, or some establishments can give you up to 1 year to pay your loan, but lots of people are already having a hard time paying their student loans, car loans, mortgage, etc. Getting another loan is the last thing you want especially if you are in a desperate situation especially if you work paycheck by paycheck, you will only be buried by the interest rates over time. Watch the video below from CBS NEWS year 2009 to have a clear understanding what really happened to 401(k) back in 2007-08.
What is the best retirement plan if not 401(k)?
Now we are asking the right question. There is an existing plan for everyone that
Grows an average of 8-12% annually and is guaranteed to grow(0.75%) even when the economy is down.
Earnings can be accessed before age 59 1/2 with no IRS penalty.
Income not included in formula to tax Social Security.
Unlimited loan benefit with no repayment required.
Terminal/Chronic illness benefit (up to $1 million from day one)
Remainder left to heirs income tax-free.
NO MARKET RISK!
NO CONTRIBUTION LIMIT
This is almost exactly the opposite of what we talked about in this article. Truth is, this plan exist and not a lot of individuals are taking advantage of this, why? because they do not teach this kind of tax-advantaged plan in school and only the rich people are the ones taking advantage of this because they are financially educated about taxes. Now think about 401(k) and this plan, which one do you prefer? If your answer is none other than the second one, congratulations, you just opened your eyes to the world of tax advantaged world. If you wish to learn more subscribe to my weekly newsletter with your email and your age and I will show you how this plan can work for you free of charge.