Category: 401(k) withdrawal rules

Should You Treat Your 401(k) Like a Bank?

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A recent article in the Wall Street Journal says it’s time to consider borrowing money from your 401(k). These loans have become more popular as more Americans get deeper into debt at high interest rates.

Most 401(k) plans offer participants the option to borrow from their plan. No credit check or collateral is required.

The IRS requires a mandatory repayment schedule of principal plus interest, currently 9.5% in many plans. That interest rate is lower than personal loans and significantly lower than the average credit card interest rate, making it appealing in today’s climate.

The article went on to explain the significant downsides of these loans. That got me thinking about how a 401(k) loan differs from a loan from your Bank On Yourself plan. So, let’s compare…

Recall that the Bank On Yourself strategy relies on a high-cash-value, low-commission, dividend-paying whole life policy. It’s guaranteed to grow by a larger dollar amount every year, regardless of what’s happening in the market or the economy.

How Much Can You Borrow and What Hoops Do You Have to Jump Through?

The IRS only allows you to borrow 50% of your 401(k) value up to a maximum of $50,000. However, you can typically borrow up to 90% of a Bank On Yourself-type policy’s equity or cash value.

That’s how, during the depths of the financial crisis, when banks weren’t lending, and credit lines were being shut without warning, my husband and I got $500,000 from our family’s policies to grow the Bank On Yourself company.

We only had to answer two questions: “How much do you want?” and “Where do you want it sent?” The money was in our checking account in less than a week.

In some companies, taking a 401(k) loan involves a 13-step approval process… just to use your own money!

[Watch Me Duke it Out in an Imaginary 6-Round Championship Fight: 401(k) Vs. Bank On Yourself Loans]

What’s the Loan Interest Rate?

The companies used by the Bank On Yourself Professionals charge below-market, simple interest, currently around 5.5%. And, like the interest you pay on a 401(k) loan, the interest you pay benefits you, as we explain in our Consumer Guide to Bank On Yourself Policy Loans.

However, unlike taking a 401(k) loan, your Bank On Yourself policy will continue growing as though you never touched a dime of it! And you don’t have to liquidate any assets to get money.

These are just a few of the reasons why so many Bank On Yourself policy owners say their only regret is that they didn’t start their plan sooner. It’s also the best sleep-through-the-night savings strategy, providing guarantees, predictability, control, and numerous tax advantages.

To find out what your bottom-line guaranteed numbers and results could be if you added Bank On Yourself to your financial plan, request your free, no-obligation Analysis and Recommendations here now.

REQUEST YOUR
FREE ANALYSIS!

Are There Restrictions on Repaying Loans?

Unlike mandatory 401(k) loan repayment schedules, you set your own repayment schedule with a Bank On Yourself loan.

Some 401(k) plans don’t allow you to make contributions while paying back a loan; some have a set time to wait before contributing again. If your employer matches your contributions, you’ll take a double hit.

These are just a few of the hoops you have to jump through for a 401(k) loan.

Taxation of Interest Payments:

You’re taxed twice on the interest payments you make on a 401(k) loan. That double taxation reduces the benefit of paying yourself interest on a 401(k) loan from 9.5% to an after-tax 6.65% for those in the 30% tax bracket. There is no such consequence for Bank On Yourself loans.

Are There Loan Fees?

The typical 401(k) administrator charges a $75 loan origination fee plus an annual loan maintenance fee of $25. That raises your effective borrowing cost.

There are no fees to borrow from your Bank On Yourself policy.

What Happens if You Can’t Pay Back a Loan?

About 8% of actively employed workers default on 401(k) loans, which jumps to 65% of people who leave their jobs. Most 401(k) plans require a borrower who leaves a job with a loan outstanding to pay the remaining balance, often in 30 to 90 days, or face default.

If you default, you must pay income tax on the remaining balance, plus a 10% penalty if you’re under age 59 ½!

Taking a Bank On Yourself policy loan is blissfully free of these pitfalls.

As I’ve pointed out in my books and on the Bank On Yourself website, even though you’re not required to, you should pay back the loans you take to make major purchases on the schedule you set. That replenishes your cash value so you can use it in retirement to take tax-free income.

If you borrow and never repay your loans, or you don’t at least pay the loan interest due, your policy could lapse if you have no cash value left to cover the loan interest. That could result in an income tax liability on any gain.

You don’t typically pay back loans used to provide income in retirement. Instead, they are deducted from the death benefit upon the insured’s death.

How to Add Guarantees, Control, Predictability, and BIG Tax Savings to Your Financial Plan…

To find out how you could enjoy liquidity, control, guaranteed growth, and peace of mind by adding the Bank On Yourself strategy to your financial plan, request your free, no-obligation Analysis right here.

You’ll get a referral to a Bank On Yourself Professional who has passed a rigorous training program and who can answer your questions about this concept and show you how you could benefit from a custom-tailored program:

REQUEST YOUR
FREE ANALYSIS!

Find out how the Bank On Yourself strategy can help you reach your financial goals and dreams…withOUT taking any unnecessary risks!

Average 401(k) Balances Have Barely Budged in 5 Years

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Fidelity Investments, the largest provider of 401(k) plans, just reported that the average 401(k) account balance barely budged in the 5 years since the 3rd quarter of 2018. They increased by only $1,200 from $106,500 to $107,700… less than 1.2% total.

To make matters worse, inflation was a whopping 21% during the same period. (Here’s a great inflation calculator.) That means those average 401(k) accounts needed to be at nearly $129,000 – just to keep up with inflation!

Okay, but what if you waited longer, say 10 years, like the “experts” say you should. On the surface, that looks better. The average 401(k) was $84,600 10 years ago and is now $107,700 (a 27.3% gain). But inflation over that period was 30.45%, so the average 401(k) would have to be at $110,357 today to keep up with inflation.

In 2022, the average 401(k) balance plunged 22.9%, according to Fidelity Investments. As I write, the market has been rallying, but you’d need an increase of almost 30% to get back to where you were… and another 3.5% increase to keep even with inflation in 2023, let alone have a gain. It’s pretty nasty news if 2022 was the year you had planned to retire.

And the typical IRA hasn’t fared any better over the last ten years, according to Fidelity:
Average Retirement Account Balances [Read more…] “Average 401(k) Balances Have Barely Budged in 5 Years”

Tax Deferral is a Scam and Here’s Proof

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Tax deferral is a con, and I’m going to prove it to you.

Actually, I’m going to let you prove it to yourself, with this 5-second experiment.

The conventional wisdom says, “Maximize your contributions to tax-deferred plans, like 401(k)s, IRAs and 403(b)s. Your money compounds without being reduced by taxes, and you’ll end up with more money during retirement.”

But is it really true?

The Society of Actuaries says that if the tax rates are the same, “It doesn’t make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.”

But most people look at their savings and think it’s all theirs. You may have forgotten you’ll owe the IRS the taxes you deferred all those years – on every penny you’ve put in and every penny of growth.

If the tax rates miraculously manage to be lower during your retirement, you might come out ahead by deferring your taxes. But where do you think tax rates are headed long term? You must consider what tax rates might be during a retirement that could last 30+ years. [Read more…] “Tax Deferral is a Scam and Here’s Proof”

Coronavirus Pandemic Exposes Cracks in 401(k) Plans

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I’ve written extensively about why more and more experts are warning that the 401(k) is an experiment that’s failed, and why the man considered to be the “father” of the 401(k) says it’s a monster that should be destroyed.

But the pandemic, shutdown and resulting economic downturn have exposed dangerous cracks in the 401(k) system. I’ll explain three of them here and show you how to protect yourself…

New 401(k) Problem #1: Companies are Suspending Matching Contributions

Tens of millions of workers have already been affected, and more companies have announced their plans to suspend the 401(k) match.

That’s a real blow for employees who’ve come to think of the match as “free money” and assumed it’s a perk that won’t be yanked with little warning.

But the reality is that the employer match isn’t really “free money” at all. According to a study by the Center for Retirement Research, for every dollar an employer contributes to your 401(k) match, they pay 90 cents less in salary to men and 99 cents less to women!

Translation: For every matching dollar you’re given, you really only receive 10 cents or less in total compensation. [Read more…] “Coronavirus Pandemic Exposes Cracks in 401(k) Plans”

How to Pay Zero Taxes in Retirement – Without Being Broke

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Do you have money in a tax-deferred retirement account such as a 401(k), IRA or 403(b)? If so, you’re sitting on a tax time bomb.

I’m going to reveal the tax traps you face and show you how to move toward a 0% tax bracket in retirement (legally!) – but not by doing it the way most people do it, which is by being broke!

Conventional wisdom says, “Maximize your contributions to tax-deferred plans. Your money compounds without being reduced by taxes, and you’ll end up with more money during retirement.”

But like much conventional wisdom about personal finance, it’s not true…

The Society of Actuaries says if the tax rates are the same,

It doesn’t make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.”

But most people look at their savings and think it’s all theirs. You may have forgotten you’ll owe Uncle Sam the taxes he let you defer all those years – on every penny you’ve put in and every penny of growth.

And according to Boston College’s Center for Retirement director, Alicia Munnell,

It’s a very big deal when people realize they only have two-thirds or three-quarters of what they thought they had.”

If the tax rates are actually lower during your retirement, you might come out ahead by deferring your taxes. But where do you think tax rates are headed long term? You must consider what tax rates might be during a retirement that could last 30+ years.

Most people we talk to think taxes ultimately must go up due to the aging demographics of our country and our unsustainable national debt. (Recently the debt passed $21 trillion for the first time.) If tax rates do go up, and you’re successful in growing your nest-egg, you’ll simply end up paying higher taxes on a bigger number. [Read more…] “How to Pay Zero Taxes in Retirement – Without Being Broke”

Congress Considers Axing Your 401(k) Tax Deduction

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Congress is considering proposals right now to take away the tax advantages of your 401(k).

To help finance the tax reforms being proposed, Congress is eyeing axing the up-front tax deduction for 401(k) contributions. And one proposal would also change the tax-deferred nature of 401(k)s by imposing a 15% tax on your annual gains.

Why would Congress consider tinkering with the tax benefits of such a popular program as the 401(k)?

For the same reason that notorious holdup man Willie Sutton gave for robbing banks:

Because that’s where the money is!”

The current taxation of 401(k) plans was estimated to have cost the federal government more than $90 billion in potential tax revenue last year alone, according to the Joint Committee on Taxation. [Read more…] “Congress Considers Axing Your 401(k) Tax Deduction”

Why Does Ted Benna, the “Father of the 401(k),” Love the “501(k)” Plan?

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The man widely credited as the “Father of the 401(k) Plan,” Ted Benna, is among those saying the plan is no longer a good way to save and invest for retirement. He cites concerns that the government may change the rules, and not in your favor; that an impending market crash will wipe out much of what you’ve saved for your retirement; and that staggering fees can eat up a large portion of your nest egg.

Benna has gone on record as endorsing something that has been creatively called a “501(k) Plan.” Ted Benna says,

I created a monster (the 401(k)) that should be blown up… I’m now putting most of my money in the 501(k).”

But what is a 501(k) plan? Don’t get distracted by the name. Although “401(k)” refers to the section of the Internal Revenue Code that deals with retirement plans, “501(k)” is an obscure Internal Revenue Code reference that describes the educational status of certain child care organizations! Using “501(k)” to refer to some kind of retirement plan is a gimmick dreamed up by Madison Avenue types.

But all they did was take the Bank On Yourself concept, which is a proven 401(k) alternative, and give it a mysterious new name, the “501(k),” hoping you’ll pay money to find out what they’re talking about.

But while others are charging you money for this information, we’ve been giving it away for years! For FREE information about the Bank On Yourself method that others call a “501(k),” download our free report, 5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game and Take Control of Your Financial Future here.

History of the 401(k) Plan and Ted Benna’s Contribution to It

[Read more…] “Why Does Ted Benna, the “Father of the 401(k),” Love the “501(k)” Plan?”

Bill Williams’ AHA Moment: How Bank On Yourself Freed Him from 401(k) Loans and Mutual Funds

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Bill Williams is an enthusiastic believer in the Bank On Yourself concept because of how it has helped his family financially. He wrote to me several years ago, and I included his letter on page 228 of my 2014 New York Times best-selling book, The Bank On Yourself Revolution:

Thanks for all the good things you are doing, Pamela. I am working with my Bank On Yourself Professional to set up my third policy, and I am so appreciative of her guidance and expertise. She has been tremendously supportive.

The real “snake oil” is all of the purported advice about savings and investing we have been fed by the “experts” in the past. I get so upset by the advice to invest with before-tax dollars into 401(k)s or 403(b)s.

I’m over sixty years old and know when I turn 70½, I’m going to have to take required withdrawals from my plans and have the added burden of paying taxes on them. After all, the IRS wants to get its hands on the taxes they let me avoid paying all those years.

I wish not only that I had learned about Bank On Yourself earlier, but that the concept could be taught to the masses when they are young enough to get the maximum benefit from it.

Here’s why I say that: I think of all of the purchases I’ve made through the years where Bank On Yourself would have been a much better means to fund them. As an example, my son’s college expenses, which I paid every cent by selling stock and mutual funds and taking a loan from a 401(k).

Needless to say, my son received a great education (to his credit), but dear old dad has nothing to show for it. I had to put money into the stocks, 401(k), and mutual fund, so I had the resources—which could have been so much more powerful in a Bank On Yourself policy! It’s as simple as that. If I had done that, I would now still have the policies, which would have even more value.

I am depleting an IRA to fund my third policy and to help fund my first two Bank On Yourself-type policies. I just hope I live long enough to enjoy all the benefits.

Bill Williams writes again, about Bank On Yourself, tax-free retirement, and dividend-paying whole life insurance

[Read more…] “Bill Williams’ AHA Moment: How Bank On Yourself Freed Him from 401(k) Loans and Mutual Funds”

Why Most Early Proponents of the 401(k) Now Say It’s a Failure

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Herbert Whitehouse was one of the first proponents of the 401(k) 35 years ago, when he was a human resources executive at Johnson & Johnson.

Today the 65-year-old Whitehouse says he will have to work into his mid-70s if he wants to maintain his standard of living, after his own 401(k) took a hit in 2008.

Whitehouse is one of a chorus of early 401(k) supporters who have changed their minds.

A recent article in the Wall Street Journal reveals how pre-retirees at all income levels are falling short – way short – of the amount of money they need to have to be able to retire.

Fully half of those between ages 50-64 have less than one year of their income saved.

The top 10% (those making $251,000 or more annually) have an average of only two years of their income saved.

The article mentions that “financial experts recommend that people amass at least eight times their annual salary to retire.”

Those “experts” ought to have their heads examined, because even a $1 million nest-egg would provide you only $28,000 a year at the current recommended withdrawal rate of 2.8% per year. [Read more…] “Why Most Early Proponents of the 401(k) Now Say It’s a Failure”

Six Reasons Your 401(k) is a Scam

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UPDATED: March, 2022

I’m going to make a very bold statement that’s sure to get me some nasty blowback. But as a financial investigator who’s exposed the truth about the conventional financial wisdom, I’m used to that, so here goes…

401(k)s are a scam. Want proof?

Here Are Six Reasons Why 401(k)s Are a Scam…

Reason #1: The 401(k) Tax-Deferral Scam

In our immediate-gratification society, deferring your taxes by funding your 401(k) sounds so good, doesn’t it?

But when the tax man eventually comes calling, he won’t ask you to pay what your tax liability would have been if you’d been paying taxes all along. He’ll tell you what your tax liability is at the time your taxes are due.

Conventional wisdom says you’ll come out ahead by deferring taxes. After all, doesn’t that mean your entire contribution can go to work for you immediately? Unfortunately, like many assumptions about personal finance, this simply isn’t true. According to the Society of Actuaries, if tax rates remain the same…

“It doesn’t make any difference whether the taxes are taken away from you at the beginning (before you put the money in a savings vehicle) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.”

If tax rates are lower in the future, you’ll come out ahead. However, most people, including most financial experts, believe tax rates must head higher, not lower, over the long term. And your retirement could last 20-30 years or more.

The reality is that you are probably sitting on a tax time bomb. Simply put, the government is going to need more money in years to come for several reasons. For example, let’s look at the numbers impacting Social Security and Medicare.

Today there are 62 million Americans using Social Security and Medicare. By 2045, 140 million – twice as many – Baby Boomers and Gen X-ers will be over 65 and requiring Social Security and Medicare. Where do you think the money to pay for that will come from?

Social Security and Medicare’s financial condition has deteriorated despite a long economic expansion. In fact, Social Security is already in a negative cash flow situation. What will happen to those funds in the next downturn?

And what about the national debt? Washington has not dealt with the government’s unsustainable debt and spending for decades, and as of March 2022, the national debt has ballooned to over $30 trillion – doubling in just the past decade! And it’s climbing at a head-spinning rate. (For a painful wake-up call, check out USDebtClock.org)

For all these reasons, the overwhelming likelihood is that tax rates will go UP over the long term, and when they do, then OOPS! There goes the whole 401(k) “tax-deferral” argument.

Reason #2: The 401(k) Employer Match “Free Money” Scam

[Read more…] “Six Reasons Your 401(k) is a Scam”