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.