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Do Americans Really Understand Their 401(k)s?

Written By: Nina Avery, CFP® | Avery Safe Money Solutions

“Today’s Rude Opinion Poll: Which description best characterizes our elected representatives in Washington, regardless of party affiliation?  They are hapless boobs, constantly passing laws that contradict each other.  They are scheming miscreants, relentlessly seeking new ways to increase taxes and spend more of our money.” Scott Burns opines in his 2007 article “In 401(k), Employers Really Contribute to the IRS” featured in The Dallas Morning News.

He goes on in his article to point out a couple of interesting facts though.  In 1981, 401(k)s were readily adopted by companies as a way to legally dump their pension liabilities and put the responsibility for creating retirement income on the worker instead of the company.  When the 401(k) was adopted in 1981 Social Security Benefits were not taxable and then in 1984, a law taxing Social Security benefits went into effect – oops.  Almost no one was affected by this in the 1980s, 1990s and early 2000s.

But here’s the catch – income limits or how much “other” money you can make before your Social Security benefits become taxable was not indexed for inflation.

You may be wondering how this affects you.  It really means the “free money” you are getting as a contribution from your employer is not free at all.  If you are 50 or younger it may actually end up costing you money.

In 10 years the average worker will receive Social Security benefits of almost $20,000 in today’s dollars.  Even if a modest 3% inflation is applied, that will mean benefits of almost $33,000.  When you apply the current formula for taxation of Social Security benefits, it means you and your spouse will be paying taxes on the very first dollar you take out of your 401(k). Or as Mr. Burns puts it, “average-earning workers who are about 50 years old today can expect the pay income taxes on their Social Security benefits from Day One.”

This is also the year 401(k) participants will begin receiving quarterly and annual statements detailing all the fees charged to their accounts and performance compared to a benchmark, per Labor Department regulations that went into effect last year.  Time Magazine did an article on the big scam they thought the hidden fees in 401(k) plans that people had been misinformed about, but American’s love affair with the 401(k) continued.

So one has to ask: Do Americans really understand their 401(k)s or are they just completely unaware that there are more efficient alternatives?

  • Would you knowingly put money into a plan that was not accurately explained to you?
  • Would you voluntarily continue to put money in a plan that could lose value or become worthless?  If your account doubled would it affect you drastically?  If your account lost half its value would that affect you drastically?
  • Would you knowingly put money into a plan where the fees and the tax implications were not fully explained to you?

Would you insure your house and your car if you were not required to?  Most people would because the cost of replacing them is too great.  Why not apply the same logic to your retirement account?

For most people, their retirement account is their second largest asset right after their home.  Why wouldn’t you take the same care with it that you would your home?

If you can take steps to avoid or reduce taxes and protect your principal with an indexed annuity or life insurance plan why wouldn’t you want to know how it fits into your overall retirement plan?

Because there are alternatives.  There are alternatives to losing money.  There are alternatives to making your Social Security benefits taxable from dollar one.  There are alternatives to paying 3-5 times the tax you really have to pay.  There are alternatives to mystery or excessive fees.  You can gain some great insight into some of your alternatives by reading a previous published article called “Taxes Are On Sale”.

For more information and to speak with a Qualified Safe Money Advisor to help you review your retirement plan for tax bombs, potential losses and unnecessary fees, email The Safe Money Pro, NinaAvery@TheSafeMoneyPro.com or call 407-367-8845 to speak directly with Nina K Avery, CFP ®, Qualified Safe Money Advisor and Guaranteed Retirement Income Expert to request your free consultation and evaluation today.

About Nina K Avery, CFP ® and Avery Safe Money Solutions:

Restoring confidence with Safe Money Solutions to help everyone create secure retirement incomes they can count on for the rest of their lives. Nina K Avery, Certified Financial Planner ™ professional, is gaining recognition in and around central Florida for being a Qualified Safe Money Advisor, Financial Literacy Coach & Guaranteed Retirement Income Expert.  With all of the economic turmoil in the markets, the country and around the world, it’s more important than ever to understand how to keep your wealth safe and secure…but also growing.

Nina’s mission is first to educate and restore confidence. Using Safe Money Solutions, she then helps her clients create GUARANTEED retirement incomes for life.  She also helps her clients avoid losing money and instead build wealth SAFELY and SECURELY.  Regardless of your current financial situation, Nina can help you get on the Path to Safe Money and sleep well at night.

Annuity123 is an educational platform only.  Annuity123 does not offer insurance, investment, or tax advice.  You should always seek the guidance of qualified and licensed professionals concerning insurance, investment, or tax matters.

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