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The 401k Trap

That’s right. You read correctly. Your 401k may actually likely be a complete trap rather than what your advisor calls “your perfect savings plan” (it’s actually an investment). In fact, when I think of the basic characteristics that I would want in my optimal savings plan a 401k meets only 1 of the 6.


Sure, those monthly updated statements you receive in the mail or email are nice to see at first glance; but do you ever look at the truth behind them? Have you seen your $100k total and immediately subtracted 30% (1.) to make $70k? 


Have you looked at your lifespan and noticed that this “perfect savings plan” that is a 401k is in an egregious penalty phase over 85% of the time (2.)? 


It’s time you took the time to learn the principle truths, not propaganda, about your 401k plan. 


Some characteristics of my perfect savings tool and how they compare to your 401k:

1. Guaranteed Return of Dollars 

I want to equip my savings plan with the guarantee of keeping my principle. Unfortunately, because your 401k is invested (not saved) in the market it is at risk of losing principle. If you have not already, be sure you have a basic understanding between the terms savings and investing. Your 401k has no guaranteed return. 


2. Tax-Free 

I also want my perfect savings plan to grow tax-free. 


Unfortunately, your 401k is not tax-free, but instead tax-deferred. Do you really understand the difference? 


If you don’t, it could cost you as much as 39.6% (3.). Boy, that total was just tremendously reduced in a hurry. Think taxes will go up before you retire? Insert that number above. 


3. Liquid 

Because we are describing a savings plan I want to be able to access the dollars in my plan at any time without any penalty. Unfortunately, with your 401k, you cannot. In fact, the truth is, until you are 59.5 years old you will pay a 10% penalty (plus income tax) to use (withdraw) the dollars in your 401k. 


However, your 401k will allow you to access your contributed dollars for 11 years (between 59.5 and 70.5) penalty free! 


Yet, come 70.5 years old the government (this is a government created plan, after all) will require you to take a minimum distribution to add to your income. Don’t want to withdraw? Well, you could be penalized up to 50% for what you should have taken but didn’t. 


4. Ever Compounding 

I tend to take what Albert Einstein says as genius. Think the same? If so, your perfect savings plan would be ever compounding. Einstein was quoted saying. “Compound interest is the Eighth Wonder of the World”. Unfortunately, your 401k does not line up with Einstein’s brilliance. Understand that when you use the dollars in your 401k everything that they could have earned throughout the life of the plan is interrupted and stopped. 


If you really understand compounding interest when would you want to stop it? Learn more about compounding interest and how to incorporate it in your savings plan here.  


5. Built for Me 

I want my savings plan built for my advantage. If the government created your savings plan and called it “The Revenue Act” (4) whose advantage would you perceive it as? Please understand that The Revenue Act of 1978 created 401ks and other tax qualified plans. 


Before 1978 investing in the market was only for the wealthy. The Revenue Act opened doors for nearly everyone to enter the market via qualified plans! Thoughts on what that did to the market (and taxable income for our government)? Why it went up, of course!  When something is claimed as a “revenue generating activity” you do understand that it will be creating revenue, right? But who is earning the real revenue? 


The Truth Is…. 


So many people (consumers & financial planners) see the 401k plan as their perfect savings plan but unfortunately, the majority of them hardly know what characteristics the 401k has (or lacks). It is time to learn a better place to store your savings. Unless, of course, you would prefer a non-guaranteed, tax deferred (not tax free), penalized, non-ever compounding plan that is really someone else’s brilliant business plan. 





  1. Assuming you are in a 30% income tax bracket upon retirement 
  1. Assuming you began the plan at age 20 and retired from this planet upon age 90.5. 
  1. According to 2015 tax brackets 
  1. Referencing The Revenue Act of 1978  

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