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Everything you know about your 401(k) is wrong. This is why.

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Retirement saving is crucial for everyone, because relying on social security is not enough to get through the twilight, especially given that the current social security system without changes is only pay an 80% benefit in 2035 and beyond. And the sooner you start, the better off you’ll be.

It’s true that tax-deferred accounts like traditional IRAs, 401(k)s, defined contribution plans, and cash balances allow you to save a portion of each paycheck, tax-deferred, to live on once you reach retirement age. Still, everything you’ve learned about these types of accounts isn’t right. And here’s the scary part – it’s not that the people who are spreading misinformation are uninformed. Many of them definitely know that what they are telling investors is wrong, but they continue because they have a financial incentive to do so.

So in this article, I’m going to explain why what you know about your tax-deferred bills is wrong and what you can do to make sure your retirement is spent on living the life you love rather than struggling to make ends meet. .

Related: A 401(k) is risky. Here is a safer investment strategy.

Tax deferral plans only sound good in theory

While most tax-deferred accounts may seem like a great thing, they actually have many serious drawbacks that negatively impact your investment and retirement goals.

You will have to deal with higher taxes in the future

You can now get a perceived tax benefit by putting money into your tax-deferred accounts, but all you’re really doing is deferring your taxes. It is true that this allows you to build a larger balance through compounding amounts, but that also means that you pay higher taxes when you finally start withdrawing your money.

As time goes by, there is always the risk of higher tax rates when you take distributions. This alone should make you think, as you could easily pay more tax than you do now. In many cases, your tax-deferred composition may not make up for the higher taxes, especially in the new economy of stagflation and higher interest rates.

Most people today go about their daily lives with a false sense of security in their financial decisions. That’s both because we’ve all been misinformed by many in the financial industry, and because most people have delegated their financial decisions to someone who has a vested interest in investing in certain financial asset classes.

It’s not until much later in life, just before or after retirement, when most people realize they’ve made the wrong financial decisions, by which time it’s usually too late.

Related: Looking for Talent? Consider setting up a 401(k) for your small business to keep up with the market.

Your money is blocked until you are 59.5 years old

All the money you put in a tax-deferred account is locked until you are the age of 59.5 . reaches. This means that unless you want to pay a hefty fine to gain early access, you’ll have to let Wall Street handle your money. There is no way to access or use the money for a better investment opportunity that may arise.

With few and limited exceptions, if you leave the workforce before age 59.5, you won’t be able to live on your investments if they’re all in a tax-deferred account. A Roth IRA allows you to withdraw your contributions, but not your income, which provides some flexibility with those funds.

You learn little or nothing about investing

When you put your money in these tax-deferred accounts, you entrust your financial future to the financial advisors and money managers who have a vested interest in you according to the status quo. Essentially, they make their money by letting you invest in certain financial instruments and have no direct responsibility or liability for actual performance.

This doesn’t teach you anything about how to make the most of your assets, how to use your assets to generate cash flow, or how to make sure you’re making solid investments. This, in my opinion, is the biggest drawback that no one is talking about: relinquishing your own financial future.

If you discover a fund, stock, or other investment you want to buy, but your retirement plan doesn’t offer it, you’re just out of luck. The limited choices are intended to keep the administrative burden low, but these limitations prevent you from having full control over the growth of your wealth.

Related: 4 Ways to Save for Retirement Without a 401(k)

Loss of other tax benefits

Other tax benefits, such as cost segregation, depreciation, and lower long-term capital gains tax rates, are null and void within these tax-deferred accounts. You also lose the increased tax deduction for assets you want to pass on to heirs, significantly reducing the ability to create generational wealth.

Ridiculous fees and charges

The small business match in your 401(k) is little more than a little extra compensation. If you only use a 401(k) for retirement, you are doing yourself a disservice. They are full cost, from administration costs to investment costs to service costs and more. And the smaller the company you work for, the higher these fees tend to be.

Even if your compensation is only 0.5%, which is the absolute lower end of the compensation range, you’re still paying a lot more for your 401(k) than you should, and that money could be invested elsewhere to help you retire. fuel growth. For example, if you cap your contributions at $19,500 per year, with an additional $3,000 in employer contributions, you’ll pay about $261,000 in fees, which translates to 9.5% of your return.

If you opt out of a 401(k) retirement plan, you can take that 9.5% and invest it in other, more effective ways that yield higher returns. But what should you do instead?

Self-direction and Roth IRA Conversion

Qualified retirement accounts that aren’t tied to an employer-based plan can be “self-directed.” This means that as an account holder you can choose from an unlimited number of investment assets, including alternatives such as real estate. Moving such accounts from your existing custodian to an account that allows full self-management is easy to do and should be a high consideration for those wanting more control over their investments.

Roth conversions can be a great way to save money on future taxes. You can convert your traditional IRA into a Roth IRA, which means you pay tax on the money you convert in the year of conversion, but after conversion, your money becomes tax-free. This is a great way to save money on taxes in the long run because you don’t have to pay taxes on the money you withdraw from your Roth IRA during retirement.

Don’t forget the J-Curve strategy

The idea behind the J-curve is that if a non-cash asset is converted from a traditional IRA to a Roth IRA and it experiences a temporary loss in market value, the tax on the asset conversion can be reduced proportionally based on the asset’s reduced value. at the time of conversion.

This strategy is available to anyone who has invested in stocks, bonds, mutual funds and index funds and has suffered a market loss. However, in the alternative space, the discounted valuation is based on information known in advance, with a plan based on a future value addition to the asset. This means that while you don’t take a long-term realized loss, you can take advantage of a paper loss to reduce your short-term tax risk.

The J-Curve strategy is underused, mainly because so few people know about it, but it can save you hundreds of thousands of dollars if applied properly.

Ignore What You’ve Been Taught About Retirement Savings

If you want to drastically change the trajectory of your retirement and create generational wealth for your family, I have a simple piece of advice: ignore everything the financial industry has taught you about tax deferred.

Take the time to learn about investing and avoid the traditional tax-deferred accounts like traditional IRAs, 401(k)s, defined contribution plans, and cash balances – instead, use assets like Roth IRAs and real estate, which are superior in literally all directions.

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