Select Page

Still drinking the qualified plan Kool-Aid?

Qualified plans are better known by their everyday names; 401ks, 403bs, IRAs, Keoghs, and a few others.  They seem like good deals.  Contribute pre-tax dollars; defer taxes on gains; and heck, some employers give away free money by matching contributions.

But you’re paying good money to have those qualified plan dollars managed.  In fact – qualified plan investors pay more in fees and commissions than those who invest after-tax dollars.  And while you pay fees and commissions on 100% of your account balance, only part of that money is yours – the rest is Uncle Sam’s deferred tax bill.  You’re just holding it in your account, investing it, and paying his cost of investing it.

Think it’s a trivial sum?

Let’s say you sock away $5,000/year in the company plan with a 50% employer match.  You grow your account at 8%/year and pay fees and commissions of 2.5% (pretty average).

If tax rates in your retirement average 40% – you own just 60% of the figure on that monthly statement.  The other 40% belongs to Uncle Sam – but you’ve been paying 100% of the cost of investing his 40% – which robs your account of a whopping $160,000.

That’s $160,000 less for you because you agreed to pick up the tab for Uncle Sam.  Could you use an extra $160,000 in retirement?  It’s not there because you’ve just participated in a $160,000 voluntary tax program.

Qualified plans are traps set by the government – disguised as steaming hot cinnamon rolls (my weakness).  Don’t fall into the trap regardless of how good they smell.