Fictitious Balance on Your 401k/IRA Account Statement

tax time bomb

Your account balance carries a hidden surrender charge.

Millions of working Americans contribute a percentage of their earnings to a 401k account while many also have IRA accounts, most of which were formerly 401k that were rolled over to IRA’s. While some people follow the daily moves of their account balances, other wait patiently for their statements to show up in the mail.
Either way, the statement balance is deceitful, a lie, incorrect, untrue, anything but an accurate reflection of what is really your money.
What do I mean?
Your account balance will be shared with the government when you take it out. Some is yours to keep and some will be taken by Uncle Sam in the form of federal income tax. To be fair, the government did not tax the money you contributed nor did it tax it annually as it grew, they wait until you begin to withdraw the money from your account before they take their share of your contributions and the growth of your investment(s).

How much of your balance is your own and how much is not is a function of the additional tax burden you will have in the year you make a withdrawal.

Your Statement Balance

Average federal tax rate at time of withdrawal

Your share of account statement balance

Uncle Sam’s share of the account balance













Imagine if this is how your 401k/IRA statement read:

September 30th, 2014
Account Balance =             $400,000
Surrender Charge ( Tax) $100,000
Net Value                              $300,000

If this was part of your statement, it sure would make it more challenging to raise incomes taxes!

I thought about this as the 2015 401k contributions limits were just increased to $18,000 annually (from $17.5k) with an additional $6,000 (from $5,500) or $24,000 per year if you are age 50 or over.

I am not trying to say that 401k’s are bad, but only making readers aware of misleading statement balances as I have quite a few clients that use their 401k as nearly their primary source of retirement savings. If federal tax rates go up, these accounts are literally ticking time bombs for investors. The government makes sure they just getting their money by the age of 71 when they require distributions begin annually and money passed to heirs will eventually be taxed at their tax rate down the road when they take withdrawals.


Related blog posts:

Why I Contribute to a Roth 401k

3 Mistakes to Avoid in Retirement

Huge Future Retirement Expense is Lurking


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Posted in Achieving Financial Independence, Counting Your Pennies, Goals-Based Planning, Investments, Policy and Your Money, Post-Retirement Planning and tagged , , , , , .

One Comment

  1. I explain to clients the *hope* is that you’ll be in a lot lower income tax bracket when you withdraw from your account in retirement; the thought being that you won’t be working in retirement so your income will be less and thus your ordinary income tax bracket will be less, too. Of course this is impossible to accurately plan for because you can’t predict the future and you have no idea what future tax rates will be. I think the best option is for investors to fund a tax-deferred investment vehicle like a Trad. 401(k) or Trad. IRA and to fund a tax-free investment vehicle like a Roth 401(k) or Roth IRA that way investors have both options available to them at retirement where they can then decide to pull money out of the taxed or tax-free account. If an investor can’t afford to fund both maybe consider pulling back on the 401(k) investment, but at least contribute enough to get 100% of the employee match, and place that difference into a Roth IRA is possible.

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