Shane Neagle
·3 min read
Financial expert Robert Kiyosaki, famed author of “Rich Dad Poor Dad” holds an opinion that may seem unpopular. The opinion in question: The 401(k) is a “horrible” retirement plan. Why does the most popular retirement plan in America seem to be such a bad idea, according to Kiyosaki?
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In addition to a myriad of mistakes you can make with your 401(k), the 401(k) plan has its own sets of drawbacks making it unsuitable for many. Read on to see the biggest of these drawbacks, per Kiyosaki’s team at the Rich Dad blog.
While the 401(k) is the most popular retirement plan, there are a few key issues.
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High Fees and Low Control
The unfortunate truth is that 401(k) plans come with high management fees. This eats into your earnings in the long run. These fees are oftentimes hidden among legal jargon, according to the Rich Dad team.
Fees can be but aren’t limited to transaction fees, legal fees and bookkeeping fees. Mutual funds often also take a percentage, usually 2%, of your investments.
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Additionally, you have limited control over your money when it is invested in a 401(k). It isn’t directly managed by you, and you are limited to what you can invest in. You also do not have immediate access to your money without paying fees. There is also no insurance on 401(k) plans, meaning your retirement account is toast in the event of a market crash.
Lastly, Uncle Sam limits how much you can invest. The contribution limits are set by the IRS annually, and for 2024 have recently been announced to be $23,000 a year. If you want to contribute more than that, you’ll have to pay taxes and penalties.
Tax Disadvantages of 401(k) Plans
Another issue surrounding 401(k) plans comes down to taxes. 401(k)s are taxed at higher earned income rates, as opposed to lower capital gains rates. You will find yourself paying capital gains taxes on other types of investments such as real estate and regular growth accounts. So why the difference with the 401(k)?
This is all thanks to the 1978 Revenue Act that granted workers the access to delay taxes until they withdrew their funds from their plan — typically at retirement.
According to the Rich Dad staff, the 1978 Revenue Act was originally created for pension funds, where the company is directly responsible for paying you out of a fund you’ve paid into. Contributions to pensions were considered to be equivalent to cash — the problem is that, in current times, strong pensions are relatively rare.
False Security of Employer Match
According to Kiyosaki’s team, there is a misconception of the employer match being a benefit. According to the Rich Dad staff, this is simply an illusion of additional income.
If you didn’t have a 401(k), your employer would still be expected to pay you the equivalent of the match. The employer is also only obligated to pay the match if you opt-in. Lastly, due to vesting schedules, it’s possible the employer won’t even have to pay the match at all. If an employee leaves before they are vested, the employer contributions are not paid to the employee.
Finally, you have no control over the funds from the employer match.
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This article originally appeared on GOBankingRates.com: ‘Rich Dad’ Robert Kiyosaki Reveals Why the 401(k) Is a ‘Horrible’ Retirement Plan
