Why Your 401k Can Be Your Worst Enemy In Retirement

Why Your 401k Can Be Your Worst Enemy In Retirement
"Your 401k can be your biggest asset as well as your biggest liability."
- Derive Wealth - 

Most people have a love/hate relationship with their 401k in retirement. They love that all the savings have added up to quite a nice nest egg.

But they hate that every single dollar they withdraw is taxed.  

I hear it all the time: why did I even save in my 401k if I have to pay all these taxes?

Why You Used A 401k

As much as the thought of additional taxes in retirement sounds horrendous, remember you received a tax deduction for your contributions when you were working. 

Not only did you receive a tax deduction for your contributions, your savings also grew on a tax-deferred basis.

That means you didn't have to report the dividends, interest, or capital gains on your tax return every year.

Both of these can add up to significant tax savings.

Why This May Not Have Been Beneficial

For the majority of retirees, this makes sense.  When you are working, your income (and tax bracket) are most likely at a high point.

You have experience, tenure, and a resume that hopefully has lead to increasing income over time.

For example, if you were in the 25% tax bracket while working, your 401k contributions skipped out on being taxed at that level.

Not bad.

Unless you are in the same or higher tax bracket in retirement.

How can that happen?

As you can see, it's possible with pensions, social security, and withdraws from your 401k.  

I Just Won't Take Any Money Out

You can, up until the government mandates you start taking withdraws.  There are exemptions, but generally speaking, once you hit age 70.5, you must start taking a portion of your 401k out as taxable income.

Why the mandatory rule? 

Remember the IRS gave you a tax break while you were working.  They now want to recoup the taxes they let you defer.

And they don't want to wait forever.  

These are called Required Mininimum Distributions and are applicable to everyone that has a regular 401k and reaches age 70.5.


It's crucial you have a retirement income withdraw strategy.  

Depending on your tax bracket and income needs, you can customize a withdraw strategy each year to minimize taxes and increase income.

Check out this article for 4 tips in creating a retirement strategy.  

Derive Wealth is an independent, 100% fee-only financial planning firm located in Pasadena, CA.  We specialize in creating personal financial plans designed to organize your life, get you to your goals, and take the worry out of your money.  We don't sell products and don't work on commissions. Instead, we provide financial advice you can believe in.