The industry-wide normal response is “of course” you should contribute to your 401(k) because the amount of monies you contribute reduces your taxable/reportable income now, your monies grow without concern for the taxation of the growth while your monies are in your 401(k), and later in life when you go to take them out (age 59 and a half without penalty and at 70 and a half you must begin to take out based upon a factor of just shy of 4 percent) you would be in a lower tax bracket. Stop the presses!
Ask yourself, “Will I be in a lower tax bracket or a higher tax bracket 5 years from now, 10 years from now, 20 years from now, 30 years from now?” One has to think we will all be in a higher tax bracket later down the road, not a lower one.
That sort of lends one to say pay the taxes now on the income – not later when you’re in a higher tax bracket. .
Question No. 2 may have us leaning in the other direction: Does your employer match? Is it 2 percent? 3 percent? 4 percent? 6 percent? If so, in todays extremely low interest rate environment, it’s quite advantageous to start out way ahead of the curve by receiving a match. It’s basically a bonus, without a current tax liability. That bonus money is yours (to win or lose).
Question No. 3: Do I have extensive choices of what to do with my 401(k) monies within the plan? Many plans are quite limited. Some plans offer only ten funds.
Question No. 4: Do I have a variety of safe, fixed options with my 401(k)?
About 99 percent of the time, the answer is no. “I only have a choice of 10 to 15 different mutual funds.”
“I don’t have a lot of choices.”
“I’ve decided to move out of the stock funds into the bond funds to protect myself.”
Be careful if this is you. Understand how bonds function. Understand the relationship between bonds and interest rates.
Question No. 5: How high are the expenses of the funds in your 401(k)? Ask your HR department or employer to see the internal costs of your 401(k). Most times, those costs are applied directly against the return of the assets in your account. Beware of high fee 401(k) choices.
Question No.6: Review the performance of your account since 2000. How much money did you put in personally? Separate the matched dollars (if any) and then compare those monies to the current value. Even though the major indicators are at or near all-time highs, many individuals are nowhere near their high water mark. Are you?
Question No. 7: Do you know the beta of each of your funds/ETFS in your 401(k). How about the beta of just the funds you are in?
Many people have a sizable percentage of their family’s assets in their 401(k), but they don’t know what the beta of their funds/positions are. You might be taking unnecessary risk without knowing, and you might not be rewarded for the amount of risk you are taking.
Your funds might be doing well, or just ok, but to obtain those results, the funds BETA might be quite high. Do your homework. Know your beta. If your 401(k) has funds with low expenses, low BETAs, a wide variety of choices, excellent results, and matching, (6 percent preferred, or 5 percent or even 4 percent), the plan sounds like a yes – you should be participating.
If any of the factors above don’t check out to your satisfaction, especially the lack of safe options, no matching funds, and high expenses, then no is the more likely response.
If you’re unhappy with the results of the above responses, the next step is to find out if your plan allows for an “in-service” withdrawal. If not, you might consider stopping your contributions and discussing with an advisor.
There are many nonqualified, principle-protected, safe-money alternatives which don’t force you to begin taking distributions at 70 and a half, and eliminate many of the bone-chilling, roller coaster riding anxiety-filled moments that go along with being in today’s stock markets are available.
Many of these non-qualified deposits provide lifetime income guarantees and many others allow for tax-fee distributions.
Keep your eyes and ears open and protect your assets – if you covet safety and security.
0 comments:
Post a Comment