Does a 401(k) still make sense?

By Capias II

Capias II


Regardless of conventional wisdom, pre-tax 401k contributions may not be the best way to save for retirement. With the very real possibility that taxes will have increased significantly by the time those saving for retirement begin to access those pre-tax funds, they could end up paying more in taxes on the funds later than if they paid taxes on them now.

When the 401(k) first became popular in the 1980s, the top marginal tax rate was around 70 percent, compared to 40 percent today. Those that are accessing their 401(k)s now are paying a lower tax rate than they would have paid at the time they were contributing to the plan.

Now take today’s worker. They are contributing at today’s lower tax rates and not paying taxes on the funds when most agree that taxes are going up in the future. How much sense does it make to save the taxes now when you would pay 15 percent to 40 percent, depending on your tax bracket, when you can build your retirement fund with after tax dollars now and avoid paying higher taxes on the funds when you retire?

Experts agree there is a very real possibility that when those contributing now are 59 ½ or older and begin to access the funds they have not paid taxes on, they will pay a higher tax rate on the withdrawals