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Why Your 401k & IRA Might Not Secure Your Future

Updated: Jun 6


Are you solely relying on your 401k or IRA for retirement? Think again. Limited control, market volatility, tax implications, and hidden fees can hinder your financial security. Explore alternatives for a more robust retirement plan. Jenkins-Financial Group can help!


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Relying on your employer's 401k or IRA might NOT be the best decision for your retiement? It's time to rethink your strategy. These government-designed plans are not as beneficial as you think...


Here's why:


  • Limited Control: Your investment options are restricted, limiting your ability to tailor your savings to your needs.

  • Market Volatility: Fluctuations in the market can erode your savings, leaving you vulnerable during economic downturns.

  • Tax Implications: While contributions offer upfront tax benefits, withdrawals are taxed as ordinary income, potentially reducing your retirement income.

  • Hidden Fees: Many plans come with undisclosed fees, eating into your returns over time.


Let's explore the scenario of James, who has diligently saved $1 million in his 401k over the years. As he begins withdrawing his retirement savings, he encounters various fees and taxes that impact his overall income:


  1. Management Fees: James's 401k plan charges a management fee of 1% annually on his account balance. This amounts to $10,000 per year, deducted from his withdrawals.

  2. Administrative Fees: On top of management fees, James faces administrative fees of 0.5% annually, totaling $5,000 per year. These fees cover the costs of maintaining and managing his 401k account.

  3. Investment Fees: James's 401k invests in mutual funds, which charge an average investment fee of 0.75% annually. This adds up to $7,500 per year in investment fees.

  4. Withdrawal Penalties: If James decides to withdraw funds from his 401k before the age of 59 ½, he'll incur a 10% early withdrawal penalty on top of income taxes. Let's assume he withdraws $100,000 in one year before reaching the eligible age, resulting in a penalty of $10,000.

  5. Federal Income Tax: Withdrawals from James's 401k are subject to federal income tax. Assuming he falls into the 24% tax bracket, he'll owe $24,000 in federal taxes on his $100,000 withdrawal.

  6. State Income Tax: James also needs to consider state income tax. Let's say he lives in a state with a 5% income tax rate. This adds an additional $5,000 in state taxes on his $100,000 withdrawal.


Now, let's calculate the total deductions from James's $100,000 withdrawal:


  • Management Fees: $10,000

  • Administrative Fees: $5,000

  • Investment Fees: $7,500

  • Withdrawal Penalty: $10,000

  • Federal Tax: $24,000

  • State Tax: $5,000


Total Deductions: $61,500


After accounting for fees, penalties, and taxes, James is left with only $38,500 from his $100,000 withdrawal. This significant reduction in his withdrawal amount underscores the importance of understanding the various costs associated with accessing retirement savings in a 401k plan. It also highlights the impact these deductions can have on James's retirement income and overall financial stability.


IS THERE A SOLUTION? YES!!!


Look beyond traditional plans and explore alternative retirement savings strategies.


Consider the benefits of a properly structured plan that offers:


  • Flexible Contributions: Adjust your payments based on your financial situation and goals.

  • Market Protection: Shield your savings from market volatility while still benefiting from potential growth.

  • Tax Advantages: Enjoy tax-free access to your savings during retirement, maximizing your income.

  • Transparency: Choose a plan with clear terms and no hidden fees, empowering you to make informed decisions about your financial future.


Let's delve into the scenario of Mark, who has diligently saved $1 million in his Indexed Universal Life (IUL) insurance policy. As he considers accessing his retirement savings, let's calculate the potential costs and benefits compared to James's 401k scenario:


  1. Policy Fees: Mark's IUL policy incurs an annual fee of 0.2% on his account balance, totaling $2,000 per year.

  2. Tax Considerations: Mark's IUL policy allows for tax-free access to the cash value accumulated within the policy. Therefore, Mark can access his $100,000 withdrawal without any tax deductions.

  3. Flexibility: Mark can access his cash value through withdrawals or policy loans without penalties. Let's assume he decides to withdraw $100,000 from his policy.

  4. Market Protection: Mark's IUL policy provides protection against market downturns, shielding his principal from market losses.

  5. Legacy Planning: Mark can leave a tax-free legacy for his beneficiaries. Any remaining cash value in the policy can be passed on to his heirs.

  6. Death Benefit: Mark has a death benefit which he can leave to his loved ones on the event of his passing.


Now, let's calculate the total deductions and remaining amount for Mark's $100,000 withdrawal:


  • Policy Fee: $2,000 (annual fee)

  • Withdrawal Amount: $100,000


Total Deductions: $2,000


By embracing a more efficient way to save and invest for your future, you can take control of your retirement and work towards achieving your financial goals.

 
 
 

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