401(k) Loans and Withdrawals Can Lead to Financial Setbacks

Dean Vagnozzi established his financial advisory firm A Better Financial Plan with the aim of educating the public on investment alternatives to traditional options such as the stock market or employer-sponsored 401(k)s. The restrictions and fees associated with 401(k) withdrawals are key reasons Dean Vagnozzi steers his clients away from investing in a 401(k) account.

401(k)s generally do not allow employees to withdraw from their accounts before they reach 59 and a half years old without penalty. However, there are very specific situations where an early withdrawal may be permitted. For example, costs associated with medical bills, primary residence purchase or repair, and college tuition may be covered with a hardship withdrawal. These withdrawals incur a 10 percent penalty and are taxed as regular income. This means that account holders will have to take out much more than their expenses in order to cover these additional fees.

Another option is a 401(k) loan, which some plans allow. While 401(k) loans are not taxable within the first five years, they can set the account holder back in their retirement savings goals. This is because while the account was funded with pre-tax income, the loan plus interest accrued must be repaid with after-tax earnings. For this reason, repaying the loan may add up to nearly 25 percent more than the amount deposited in the first place. Also, if the borrower leaves the company or doesn’t pay the loan within the specified time frame, it will automatically be considered a withdrawal and incur taxes and penalties.

Why the 401k is Not Always the Best Retirement Plan

An experienced financial advisor, Dean Vagnozzi is widely known for his unconventional approaches in financial planning and investment. Through his firm, A Better Financial Plan, clients receive advices that are unheard of from traditional financial advisors. Dean Vagnozzi openly criticizes 401k stating that it is not the best option available for retirement planning.

The most common retirement plan that many people invest in is 401k. Perhaps they think the 401k is the best option they have. When analyzed against factors of safety, growth, liquidity, and tax-free returns, 401k is not the most solid option.

1. 401k is not safe from loss - Most people fund their 401k by using mutual funds. Characteristically, the values of mutual funds rise and fall every day, and the potential for loss ranged from 30 to 50 percent of their values.

2. 401k’s potential for growth is not consistent - People have been misguided to believe that 401k has a growth potential of 8 to 10 percent. The idea is taken from the stock market’s earning records in 100 years. However, people do not have a 100-year window to invest in 401k. The time to invest in 401k ranges from 10 to 40 years. Looking at how the stock market has performed in 10-to-40-year windows, the record shows only 3 percent growth.

3. 401k is a very illiquid investment - The money that a person puts into his or her 401k remains locked up until he or she reaches the ages of 59½. So if that person started putting money into his or her 401k at 30 years old, he or she has to wait for 29½ years before he or she gets to enjoy his or her money.

4. 401k plans are not tax-free - The taxes that accrue on the 401k are deferred, which means, the investor will pay the taxes at a future date when tax rates are expected to be higher.

A Better Financial Plan offers a better alternative to 401k and it can be accessed through www.getabfp.com.