A 401(K) account may be a working person’s best friend, but once a person retires, that 401(K) may be anything but a friend to them. There are a number of significant disadvantages to keeping a 401(K) in retirement. Primary among these are the possible adverse tax consequences. 401(K) withdrawals are taxable as ordinary income, meaning they can be taxed at rates as high as 37%. Also, 401(K) withdrawals count as earnings and may increase the amount of taxes you need to pay on social security benefits. Also, 401(K) funds are subject to RMD’s, meaning the government will force you to withdraw some funds starting at age 70.5, whether you want to or not. As a remedy to these situations, consider working with a tax planner.
- You need to be aware of how much money you are required to withdraw and when or it might cost you and additional tax.
- You will be paying at the income tax level at the time. If you are very successful that may be considerable higher and it could bump your social security benefit taxes higher as well.
- You are at the mercy of the government not to make changes to the way taxes are handled on the 401k benefits. It could change at any time.
“Your traditional defined contribution plan is pretty much the only type of retirement account that requires you to withdraw money even if you don’t want to.”