Hear, hear! Ignore the nattering nabobs of negativism. Despite a flurry of recent articles to the contrary, MarketWatch columnist Howard Gold makes a strong case as to why plan participants should dismiss the 401(k) cranks. The short answer?
“Misinformation blurs the fact that it’s the best retirement vehicle for most people,” Gold bluntly states.
“I won’t link directly to these specious pieces or name the authors, because it would give them the publicity they crave, but their arguments are familiar: Your money is tied up for decades, you may be taxed at a higher rate when you withdraw it, you have high fees and poor investment choices, and you’d be better off investing in yourself, whatever that means.”
Although 401(k)s have some big flaws, he argues that they’re still the best retirement-savings vehicles for the vast majority of Americans. Without them, many people wouldn’t save at all, which is why he wisely urges everyone to invest regularly in their 401(k) plan if an employer offers one.
Here’s the rub of the criticism: Plan participants didn’t pay taxes on the money they invested during their working years, but now that they’re retired, the IRS wants its cut. Owners of 401(k)s and traditional IRAs must take distributions by the year after they turn 70 ½, all of which are taxable.
“But that’s not really such a big deal,” Gold notes. “First of all, that money has been growing tax-free for years. Unlike in taxable accounts, you didn’t pay taxes on profits, reinvested dividends or capital gains distributions. And amazingly, some advisors are absolutely convinced you’ll be paying higher taxes when you retire than you do when you’re working.”
“I believe tax rates will go through the roof because of several impending financial crises involving Social Security, Medicare and pension,” he quotes industry guru and gadfly Ed Slott, known as “America’s IRA Expert,” as sayng in a recent interview.
“Really, Ed? Republicans probably have a lock on the House of Representatives through 2022, and that’s where all tax bills start. I haven’t heard them talk about raising taxes lately. And if marginal tax rates eventually go up, they’ll almost certainly rise for top earners only. In fact, taxes for most of us are likely to be lower after we retire.”
Without the ease and discipline of 401(k)s, with their automatic payroll deductions, most people wouldn’t save for retirement at all, Gold concludes.
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
