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.

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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 (opens in new tab), 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.

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 (opens in new tab) or with FINRA (opens in new tab).

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 Principal, Centennial Advisors LLC

Michael Reese, CFP, CLU, ChFC, CTS is the founder and principal of Centennial Advisors LLC (opens in new tab), with 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. His focus is to help retirees enjoy financial security in any economy, something that he believes is sorely lacking in today's financial world.