The Triple Ten Tax-Trap Let me give you a good example as to why the government is interested in the future calculation of your retirement plan. I call this my Ten, Ten, Ten Tax-Trap Story! So, let’s pretend you are age 40 and invest $100,000 each year for 10 years at a 10% rate of return = $175,311. Let’s assume that you are in a 33% Fed & State tax bracket, so you will be paying a total of $57,852 in taxes. This leaves you with $117,459. This assumes you are not paying any management fees. Keep reading. Remember, you are the only one taking all risks, paying all the fees, and your money is not liquid. What if you only earned 9% and were having to pay a management fee? Should you be concerned? I would think so! Is there a better way to save than using the government’s qualified plans? The 401(k) Rollover Decision Consider an employee, age 35, who recently changed jobs. He is now faced with a common decision: what to do with the $100,000 balance sitting in his old 401(k). His options include rolling it into his new employer’s 401(k) plan. Here’s what makes the new plan attractive: The employer matches 50% of contributions up to $3,000 per year. The employee is in a 25% combined federal and state tax bracket. He plans to contribute $25,000 annually, the maximum allowed. According to his CPA, this contribution will save him $4,403 in taxes each year. Add to that the employer match—“free money” of up to $1,500 annually—and the case looks strong on paper. 401(k) vs. Alternative Tax-Advantaged Strategy Let’s revisit our employee, age 35, who wants to roll his $100,000 401(k) into his new employer’s plan, contribute $25,000 annually, and capture the 50% match up to $3,000.
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