A 401(k) may seem like it’s always been a part of the retirement landscape; but it hasn’t been. In fact, initially it looked like a targeted loop-pool for the rich. It was created almost by accident.
A group of high-income earners from the Kodak company approached Congress in 1978 because they wanted to invest part of their salaries in the stock market, while also being exempt from income taxes. That year, a Revenue Act was passed that allowed taxes to be deferred based on the amount of the compensation that was deferred from current income. That provision was written into the tax code through section 401(k).
It wasn’t until 1981 that the IRS created rules allowing employees to set-up salary deductions from their payroll checks. In 1982, Johnson & Johnson and Honeywell offered 401(k) plans to their employees for the very first time.
So, today 401(K)’s are middle-age. Is it accomplishing what people expected it to do?
Since the onset of 401(k)’s, pensions have become less and less part of the retirement landscape with more of the risk of retirement, being placed upon the individual.
Since the onset of 401(k)’s, people fear and fret more and more about the ups and down of the stock market, watching their retirement account balances as if they’re on a rollercoaster ride. When retirement was a pension, it was considered a sure thing.
Since the onset of 401(k)’s CNBC was created. That happened in 1989. It now looks more like ESPN’s sport center than true financial advice. Are you a CNBC fan or have you become a CNBC victim?
Since the onset of 401(k)’s, taxes have been deferred and compounded inside these retirement accounts and someday they will come due. Do you believe taxes are going down, staying the same or going up into the future? It seems to me, that some 401(k) participants are simply deferring the pain of paying taxes until taxes are new and improved in the future? Yah, right. I have some clients who limit how much they take out of their accounts each year because they fear paying the taxes. Weren’t we suppose to enjoy our money at retirement? Instead, 401(k)s have become a tax-trap for some.
If you have a 401(k)…you have an account; but you don’t have a plan. What’s your plan to maximize your 401(K) during the distribution part of your life, your retirement? A 401(k) can be a great accumulation account; but, what is your de-accumulation strategy?
Is the 401(k) having a mid-life crisis…with your money? Perhaps it time to review and strategize.