Recently, I have been doing interviews on radio stations around the country. With the downturn in the stock market, every radio show host asks me the same question – What should i do about my 401(k)? Should I continue putting money into my 401(k)? What if my employer matches my contributions? Does that make a difference?
I'm going to give you an answer that you may not like. But it's the truth. Stop putting money into your 401(k), EVEN IF your employer matches you 100%! I say this for two reasons – tax savings and leverage.
Let's start with tax savings. Unless you 401(k) is a Roth 401(k), you are merely postponing your taxes to a later year in a 401(k). Now, if your only choices were to pay now or pay later, you would certainly want to pay later. But these aren't your only choices. Of the over 5,600 pages of law in the Internal Revenue Code, less than 400 relate to postponing or deferring income taxes such as with a 401(k) or regular IRA. The remaining 5,200+ pages explain how to permanently reduce your taxes.
So which do you prefer – temporarily postponing your taxes like most people do or permanently reducing your taxes like we teach our clients at ProVision? If you want to permanently reduce your taxes, don't be putting your money into a regulard 401(k). Instead, invest in some good permanent tax planning and get those savings every year without having to pay it back.
I will blog another time about the other reasons I don't like 401(k)'s.