For most American in the private sector, aside from their pension, if they have one, their 401(k) is most likely the biggest part of their retirement asset planning.
This means that how much is invested into it and how well it performs in the market. Investments has everything to do with their quality of life in retirement. Let’s tackle the issue of maximizing 401k contributions in this article.
The conventional wisdom from most advisors will be to tell you that maximizing 401k contributions is the way to go. Should one consider why the advisor may say this as they are in the practice of IRA roll-overs?
Of course, if the employer matches up to a certain limit, we would encourage to at least make the contribution to get the match. However, does it make sense really to invest more than that into your 401(k) tax-deferred salary reduction plans? You may check out this 401k contribution calculator tool from Bankrate.com
Let’s explore five reasons if maximizing 401k is the right approach for you. Of course you decide based on your current situation and future plans.
Tax deferral is not the benefit you might think
When you contribute to your employer retirement plan you are contributing to a tax deferred program. So if you make $1000 and defer at 10%, you invest $100 and are only taxed at the current income rates the other $900. So what have you done?
You obviously have deferred taxes on the $100 at a known income tax rate, only to defer the tax on the $100 and any growth on this $100 as far out into the future as possible to an unknown tax rate.
This puts the tax on this future money completely outside of your control. What if when you actually take distributions on this you are at a higher tax rate than when you put it in?
Aside from the current rhetoric that our next administration wants to reduce taxes for everyone, there is still a $19 trillion debt that needs to be paid or put under control.
Does the fact that market losses can devastate your 401(k) growth? Remember 2008 and 2009? So maximizing 401k does not take care of the losses.
It is a known fact that it takes a higher return to break even than it did to experience the loss. A 30% loss will require a 42% return just to break even.
So did all this maximizing of your 401(k) perform for you as promised? The closer you are to retirement the less risk you can take. Consider this when you continue to maximize your contributions.
Consider non-qualified investments
In our scenario, how about considering contributing only 5% to help meet an employer match of 3%, and pay the tax on the other 5% now, so you maybe have 4% net to invest outside of the retirement plan.
How about if you invested that into instruments that were tax-free such as municipal bonds. Yes, that is what I said, municipal bonds.
With a well thought out plan, one could diversify among many different municipalities and experience no Federal Income tax obligations.
In addition, you could experience some state tax-free information. Your research will on this is will be important as well.
Invest in a cash value insurance policy
You heard me correctly, use insurance as a retirement vehicle. If you simply maximize your contributions to the non-MEC limits and minimize the death benefit, you have created a policy that you can draw from with loans and distributions on a tax-free basis.
In addition to this, you are leveraging your resources in the death benefit for your family. For this strategy, you should consult your qualified insurance agent and financial advisor.
Invest in foreign investments
Now for this, we are not saying mutual funds that simply have foreign companies in them. We are saying actual offshore accounts that are legal and legitimate and are considered direct placement investments.
You will need to do your research, but this strategy has the potential to have greater returns than could actually occur in the standard 60/40 retirement plan strategy.
I trust that you have more reasons and more ideas to maximize your future and not necessarily maximizing your retirement plans.