Q: What is the difference between a mutual fund and a 401(K)?
A: The amount of governmental control over YOUR money.
To be fair, there may be some small tax savings, but you will not know that until you are retired and drawing down on your 401(K).
The big sales pitch for 401(K)s- or any retirement account- is that you pay no income tax on the money you contribute to it in the current year, but you do pay income tax in the year you withdraw it.
Do you know what the tax rate will be in the future? No.
Could the tax rate be higher than it is now? Yes.
Are tax rates currently at their lowest in the history of the IRS? Yes.
Will tax rates go up or down in the future? That is the great unknown in this equation.
So, why do some financial “gurus” advise you to load up your 401(K)?
Because it sounds good. And, they often also offer financial advisor or financial planner services where they make money when you create, contribute, or move your retirement funds to their affiliates.
Sound a little manipulative?
It is.
What are the benefits to a retirement account?
Well, aside from the current income tax savings (and possible, but not guaranteed net income tax savings), the biggest benefit is when your employer offers a match. There are usually caps on matches, but it can be any easy way to double your contributions.
How do you save for retirement without a retirement account?
Guess what? Any investment can be used for retirement. You could invest in stocks, bonds, annuities, gold, rental properties, real estate, even a house. Any assets that you can live off of in retirement can be considered a retirement account. The only difference between an account you use in retirement and a retirement account is the amount of money you pay in taxes in the current year, how much income tax you pay in the future, and how much control you give the government over your money.
When you contribute to a 401(K), 457(B), IRA, or similar account the government will penalize you if you take the money out before the government tells you it is okay and they will also penalize you if you do not take out the minimums they decide after you reach a certain age. That means that even if you do not need the money, you have to withdraw some of the money in your account each year after you reach a certain age. Think about it. You could have an investment making a great return and instead of letting it grow, you have to cash it out. What?!?! Or you could have your account take a hit and have to cash it out before it has a chance to recover. Seriously. The government does not take extenuating circumstances into consideration.
Does this mean you should completely avoid retirement accounts?
Not necessarily. This only means that you will want to educate yourself about your options and the pros and cons of each one. Then make the best decision for yourself.