On the surface, this seems like a smart financial move: maximize contributions, reduce taxes, and capture the employer’s match. But as we’ll see, the traditional 401(k) approach also carries hidden risks, costs, and limitations that most employees never fully consider. Here’s an employee, age 35, who has changed jobs and is considering rolling over $100,000 from his previous 401(k) to his new employer’s 401(k) plan. His employer is going to match 50% up to $3,000 added each year of employment to the employee’s retirement account. He is in a 25.9% tax bracket with Federal and State income taxes. The employee is planning to deposit $25,000 each year into his retirement plan. This would max out the amount he could put into the plan, and according to his CPA this would save him $4,403 each year. Plus, he needed to take advantage of the employer’s match. Free Money! He had just completed “Peace University” in his local church, and he had also read Dave Ramsey’s book, “Total Money Makeover”, and on page 155, Mr. Ramsey states that the stock market has averaged just below 12% annually throughout its history. (WRONG) So, the employee figures, being as conservative as he is, that he should be able to earn an average rate of return of at least 6%. He plans to work until the end of age 65. Still, in amazement, he has his financial advisor run the numbers on his financial calculator and after inputting all the numbers, the total came out to $4,525,639 million dollars. He is going to be rich! Or at least he thought so. The employee’s heart is filled with excitement because he had never dreamed he would have this much money when he retires. However, remembering what his mother had taught him, “If it looks too good to be true, better do more research and get a second opinion”. The employee remembered hearing me on my radio program as I was sharing with my radio audience about the hazards of qualified plans. He had even ordered a copy of “Common Sense Economics for the Family”.
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