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10 responses to “Fact or Fiction? Slaying the Myth of the 401k Tax Advantage Myth”

  1. Joe Johnson

    Have you considered the affects of Roth 401(k) investing where qualified distributions are tax free?

  2. Jack Quimby

    Introducing the argument that one will pay higher taxes after retirement based upon factors such as the loss of the mortgage interest deduction are a means of distracting from the argument. It also shows a lack of true value to their argument.

    A fact; loss of the mortgage interest deduction implies that one has either dropped below the deduction threshold, or is no longer paying on a mortgage. If it is the former, the loan will be paid of shortly. If the latter, then the argument is out the window. Fulfilling the terms of the mortgage means that this entire payment amount is now available to you each month. Rather than have to pay $1000 to a note holder in order to obtain less than $100 in tax savings (if you are near the end of the note term) you now have the entirety of that $1000 at your disposal each month.

    If the goal is to maximize a retiree’s total holdings, the presenter of this argument has shot themselves in the foot. Best to stick with the discussion at hand rather than introduce spurious notions into an argument you are about to lose.

  3. September 11, 2013 | The Morning Pulse

    […] Fact or Fiction? Slaying the Myth of the 401(k) Tax Advantage […]

  4. Chuck Miller

    I don’t think you can say anyone will pay lower taxes after retirement because of a 401(k). Taxes paid/or the “effective tax rate” someone pays is based on a wide variety of factors, and you can’t tell a 25 year old s/he will pay lower taxes when s/he is 70 because of deferred taxes on a 401(k). No one knows.

  5. shawn

    No one seems to want to address the impact of SS on your marginal tax rate. I am in the 15% marginal rate for income from my 401k – but because up to 50% of my SS benefit is taxable (for some individuals up to 85% is taxable) I am actually taxed at the 22% marginal rate. At least for the fraction of my taxable income that equals half my SS income.

    Also, not discussed is the fact that the first 18.6K (for a married couple) is not taxed at all. This is true while working and in retirement. Just considering the principal contribution – say 10K/yr. for 40 years – a retirement account worth $400K. That 400K wold have been taxed at a 15% rate while working. But if it is withdrawn at 18.6K/yr. over a twenty plus year retirement – it generates zero tax liability.

    I think that one needs to do a much deeper calculation to determine total tax liabilities in retirement.

  6. Dorann Cafaro

    Perhaps it is not “tax advantaged” but it sure does have advantages – first it provides savings that most would never have had without 401(k) contributions = savings advantaged. Also consider that for every penny they save they actually lived on less take home pay so the penny saved (with or without the tax savings) became 2 pennies earned.

  7. Rod

    Thanks for one of the few articles challenging the conventional wisdom on 401K plans. It’s a complex question with many more factors, such as taking into account:

    1)inflation (even if I could get 8% returns inflation wipes most or all of this out).
    2)Opportunity cost: Money “saved” in 401K can not be applied to pay off other debt such as mortgage.
    3)Only a fool would assume taxes are going to be LOWER when the US Govt has over 100 trillion in unfunded liabilities if standard accounting practices were used.
    4)the trend starting in foreign countries to “nationalize” retirement plans in order to pay down Govt debt today and pay you worthless, devalued fiat currency in retirement.

    As far as early withdrawals, the current 10% penalty could easily be increased to 20% just like it has been done for Health Savings Accounts.

    Bravo on applying some independent thinking in this article. Most seem to be written by hacks working for wall street brokerage firms.

  8. Response to an Article Criticizing 401(k) Plans | retirementracket

    […] Carosa’s thorough and objective article about the debate over the tax advantages of 401(k) plans is far more informative.  I would highly […]

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