Why You Should Not Max Out Your 401(K) Before the End of the Year – Episode 328

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[00:01] Welcome to the Prosperity Podcast. In today’s episode of the Prosperity Podcast, we’re going to be talking about why you should not max out your 401k before the end of the year. Kim, I’m going to request that you don’t scream because I know how this makes you feel. Well, it’s just quite comical because everybody’s answer to, ah, I’m paying too much taxes, is to focus on deferring that tax problem. And you’re right, it does make me want to scream. And I’m not saying that sometimes a little contribution to a 401k to get a match, for example, is a bad thing. That’s perfectly acceptable. But beyond that, let’s understand that deferring is all you’re doing. So let’s get clear on what I mean by that. If you are putting money into a 401k, a 403b, a SEP,

[00:56] a simple, an IRA of any form, and we’re not talking Roths, we’re talking deductible IRA slash 401k contributions, or if you’re in Canada, you might call it a RRSP. Any of these things that you are getting a deduction for today is actually a deferral strategy. It’s actually just burying your head in the sand, kicking the can down the road, whatever analogy you want to use, and pushing off the tax problem to later. And so it’s so important that we understand that’s what we’re doing. Putting dollars into 401ks and other types of IRAs is, though we call it a deduction, and yes, we do get a deduction, it is a deferral strategy. It’s a, I’ll deal with this later strategy. Now, why do you think it’s not positioned in that way and most people don’t look at

[01:53] it like that? That’s a really good question. All I can guess is that somehow in the press, which is where so much of us get our information, and clearly the press doesn’t have a lot of financial knowledge, even the financial writers I find sometimes don’t have a lot of financial knowledge. They have termed it, they have worded it in such a way to cause confusion. And then I think also because we are such a today society, like we’re not focused very much on the future, we’re a, oh, you know, let’s cross it off our list today and move on. We are not paying attention enough to understand or to ask enough questions to get clear on this issue of where it’s really a deferral and not a deduction. I mean, I talk to people that are smart, capable people, and they think things that,

[02:52] again, the press I think has brought forth like that they’re going to be in a lower tax bracket at retirement. Well, that assumes about five specific things are going to occur, none of which are guaranteed. And yet it’s parroted, right? It’s a parrot, like just repeating, lower tax bracket at retirement, lower tax bracket at retirement. And that’s, I think, why our society has so much misinformation around this space. Yeah, absolutely. And so when we think of deferral, I would love for us to actually dive in and like get our hands a little dirty on this. And so we’re talking again, the deferral of taxes, correct? That is correct. So yeah, let’s be specific. You earn $100,000. You’ve decided to put $10,000 into a what’s called qualified plan. So again,

[03:41] IRA, SEP IRA, 401k, that type of thing, not a Roth, just so that we’re clear. We’re talking regular qualified plan dollars. Qualified meaning the IRS controls the deal. And so let’s think through that. All right, so you have 100. Now you put 10 in. So you’re only taxed at 90,000. And that’s why it appears so good. But let’s understand what’s happening with the 10. The entire $10,000 is now in this thing called a qualified plan, an IRA, a 401k, whatever. And now that money’s locked up until you’re 59 and a half. So first of all, that could be problematic because you really can’t get at it without jumping through a whole bunch of hoops, paying a bunch of penalties and taxes. So the money’s locked up. And then the money is going to

[04:30] be taxed at whatever tax bracket you are in the future when you’re 59 and a half. So first of all, you don’t know what tax brackets are going to be in the future. They could be higher. They could be lower. They could be who knows what. Second of all, you don’t know what income you’re going to have in the future because your income determines what tax bracket you’re in, not your age. So this moniker of, well, I’ll be in a lower tax bracket at retirement, it has to do with what your income is at retirement. It has nothing to do with how old you are. Thirdly, we have typically in this space where the $10,000 is sitting investments that are most often in the stock market. They’re typically mutual funds. Sometimes

[05:11] they’re target date funds, which are even worse. And so you’re putting that money into a roller coaster ride. It could end up with more or it could end up with less, who knows? And you’re subjecting it to a whole bunch of risk that you cannot control. So you’re making a deal with the government. They control 100% of it. And you’re just hoping to have it work out well on the other end. That doesn’t sound like a very good strategy to me. No, not at all. And the problem with that is the biggest variables are the uncertainty that’s happening, at least speaking from America. I mean, we have an election coming up next year. We have some politicians that are wanting to change the tax laws significantly. And so

[05:55] if you’re trying to create cash flow, or you’re trying to be more prosperous, by putting money into these programs, you are setting yourself up for serious disaster in the future. Yes, it’s very interesting. There is a book that I want to refer us to that we’ll put some links to in the podcast show notes that can give us so much confidence about where America is heading. And yet we want to maintain control. The book is also going to give us a lot of confidence about where the dollar is heading, about where energy is heading, all very critical things. But we can take advantage of that only if we maintain control. Well, if you take a deduction to put money in a qualified plan, you have now lost 100% of control of that money.

[06:42] Absolutely. So very true. Do you remember what the title of that book is? Yes, it’s called The Accidental Superpower. And it is by Peter Zeyn, Z-E-I-H-A-N. And I will email you links to include in the show notes. Perfect. So one thing that we have to go back to, and that’s what’s wonderful about having these principles of prosperity, is that we can simplify all of the noise, all of the speculations down to a principle versus looking at the different plans. So one, control. As long as you control it, then now we have the ability to have some agility. Does that work? Ability for agility. That’s a Twitter thing or something. That’s cool. We’re going to have to use that. And I think depending on who is listening,

[07:35] if you had your money in the stock market in that mid late 2000s, you know what it was like to see your 401k bounce around. It was pretty scary. Yes. And it is because you are not in control of it. And so when you control things, they can still bounce around. It’s not like it solves that problem, but you at least have the chance to do something about it. And that’s a really critical addition. And as we know, control is one of the principles of prosperity that we talk about all the time. And this is just a space that we, as a society, have done a poor job with. We’ve been getting rid of our control, abdicating, I think is the right word, to financial institutions, to the government, to the media and the press. And we need to stop doing that.

[08:25] We do. So I would love for us to provide a solution. So we started the episode out saying to not put your money into those 401ks and max it out. What is the solution? I think to begin with, it’s to build cash that is after tax, like pay the tax and keep the money. So in my earlier example, instead of having 100,000 deducting 10 and having 10 stuck inside the 401k plan, only being taxed at 90, go ahead and take the full 100. Let’s just say rough numbers, you’re going to pay $3,000 of that in tax and take the $7,000 that is after tax money and keep it. And if you don’t know where to keep it, then just keep it in a savings account at a bank to begin with so that you can start your education of learning where a better place to store cash is. So that’s the first step is just go ahead

[09:18] and pay the tax, which is an important message to hear in a lot of cases. There’s a lot of times when it’s just best to go ahead and pay the tax. And then of course, the second thing is to dig in and learn where you can store cash effectively. And that of course, for our listeners is the whole life insurance policy. If you’re new to the podcast, reach out to us if you need to learn a little bit about this space of storing cash. And you can do that at Hello at partners number four, prosperity.com. And then the third aspect is to keep seeking other deductions, whereby you don’t lose control of the asset for so long. I mean, it’s one thing to lose control for maybe three, four or five years, even maybe 10 years, but good heavens, let’s

[10:06] not be losing it for 20 or 30 years. So if you are in need of deductions and you have a lot of cash, again, reach out to us at Hello at partners for prosperity.com because there’s absolutely ways to get deductions and maintain control. Whereas the 401k is to get a deduction and lose control. You know, I love that thinking it’s something that you’ve taught us listeners for a long time. It’s getting both. And you know, you’re going through and you’re saying you can hold onto your cash and create opportunity and get those deductions. There’s no reason why we should be limited in what we’re doing. Very well put. And when you have control, then you’re not limited. Absolutely. Well, thank you for spending time with us on the podcast today. You can send

[10:58] your questions to Kim at an email address that is dedicated for listeners. That means you send a question. It’s going to get answered by her. And so be as specific as you can. And she’ll answer that to help you. And you can send the email to Hello at partners, number four, prosperity.com. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.