5 Ways Your 401(k) Is a Tax Trap (and What to Do about It)

That massive 401(k) nest egg that you're so proud of comes with some serious baggage. Here are five major cons of these accounts and a couple of alternatives to consider instead.

(Image credit: Getty Images)

Just about every financial expert I know advises savers to contribute to their company’s 401(k) plan — at least enough to receive the employer’s matching contribution.

I can’t argue any differently.

That company match is free money — a bonus from the boss — so why not cash in if you can?

And, of course, the tax breaks are another bonus. Because the money comes out of your paycheck before taxes are calculated and compounds every year without a bill from Uncle Sam, investing in a defined contribution plan is bound to make April 15 more tolerable.

Not a bad deal, right?

Until you’re ready to retire, that is. That’s when a 401(k) (or 403(b) or traditional IRA) suddenly becomes the worst possible retirement plan, from a tax perspective, a saver could have. Here’s why:

Written by Michael Reese, CFP®, the founder and principal of Centennial Advisors LLC, which has offices in Austin, Texas, and Traverse City, Mich. Michael's vision is to help American retirees "re-think" how they manage their financial portfolios during their retirement years.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Michael Reese, CFP®
Founder and CEO, Centennial Advisors, LLC

Michael Reese is the founder and CEO of Centennial Advisors, LLC. He is the host of the television show Retiring Well and the author of two books: Retiring Well: How to Enjoy Retirement in Any Economy and The Big Retirement Lie: Why Traditional Retirement Planning Benefits the IRS More Than You. He has been featured in major publications such as Kiplinger, U.S. News & World Report and Yahoo Finance. Reese also is a featured speaker at industry events.