3 Things You Need to Know About Your 401(k), Simple IRA, 403(b) and 457 Plan

Let’s say you’re going to go into business. Why not partner up with someone willing to match everything you put into this new business by 50%?  That means for every $1 you put in, this willing partner will put in another 50 cents.  Typical Financial Planning advice says you can’t lose. And that this is like getting “free money.”

At first glance, it does sound like a grand idea because it gives you $1.50 for every $1.00 that you could come up with on your own. But here are some facts you should understand before you accept this partnership offer.

  1. Your willing partner, unbeknownst to you, gets a tax credit & a tax deduction for their contribution.
  2. You will be allowed to defer the taxes owed on your own contribution until later.
  3. When you take your profits from this company, you will pay taxes, plus a 10% penalty unless you delay taking profits until you are at least age 59 ½. You will pay 100% of the taxes owed on the growth and contributions.

In other words, this willing partner was really in need of a tax credit, and you came along right at the exact time to help them out.  Their “free money” they were so willing to contribute to your business, really wasn’t free money at all.

Years later when you begin to take your profits, you find out that the “free money” has had a considerable cost.  In fact, it will cost you a significant amount of all the profits generated.

So now, you’re retired and you begin to tap into those profits; everything up to $9,700 won’t be taxed, anything between $9,700 and $39,475 you will pay 12% in tax, while the next tax bracket, which is 22%, will take effect on anything you use that is over $39,475.[i]

If your Social Security income is $3,500 a month, everything you take from the profits of this business of yours to enhance your retirement will be taxed at a rate of over 22% or more.  Therefore, your partner helped put you into a tax bracket that will pay the taxes they didn’t have to pay because of their contribution.

Your business of course was a 401(k), Simple IRA, 403(b) or 457 Plan. And your willing partner was your employer who set up that plan in order to receive a tax credit on their taxes NOT yours. And here is the problem, you have to take those profits in a systematic way or be fined 50% of what you will be required to take.

If you have $500,000 of profits (account balance) you must take that money out systematically because the IRS requires that you take out a certain amount each year for the rest of your life or pay the 50% penalty.

  • If you are 72 and have $500,000 in your account you must take out $19,685 each year and that means your taxes will be $1,357

But it gets worse because of the tax on Social Security Benefits.  At $19,685 per year and $42,000 of Social Security, you have an income of $61,685 which means you qualify to pay taxes on 85% of your Social Security Benefits check every year on top of the $1,357.

As you can see, that willing partner was not really interested in helping you avoid taxes as much as they were willing to avoid paying taxes themselves had they not been willingly to contribute 50% to your $1 contribution.

Fortunately, if you are in your early 60’s up to age 71, we can still help. By converting your profits from these plans prior to the time you are required to take distributions from them, you may be able to pay less, rather than more, and still benefit from your discipline of saving all those years.

Everyone’s situation is different. To find out if you can avoid paying more taxes, give us a call. We’ll see if you can benefit with our plan to help you keep more of the money you have made.

And if you’re younger than this age group, you have time on your side.  Call us because we can definitely help you get a plan to keep more of the money you make.

Dr. Tomas McFie Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. I help people beat the system with a financial formula that minimizes taxes, reduces fees and cuts losses so they can keep more of the money they make, grow their wealth and never run out of money.


[i] 2020 Federal Tax Rates for Single Filers