Contributions are taxed at withdrawal, cash in your bank account isn’t. If you’re saving 30% when you contribute but paying 40% when you withdraw, that can be worse than paying upfront.
Obviously, long term capital gains should be part of the equation but if you’re young in a lower tax bracket but a lucrative career, 401k can be a terrible financial decision.
I get where you’re coming from, but keeping retirement separate from an ‘in case shit happens’ fund is key. A nominal contribution to a 401k isn’t entirely a bad move, though—it still offers tax deferral and potential employer matches, which can be worthwhile even if you’re not going all-in on it as your only long-term savings strategy.
Roth 401(k)’s are actually worse here. Unlike 401k’s it use post tax deposit so there’s zero tax advantage upfront. You also need to both pay taxes and a 10% penalty on early withdrawal of any gains, so it’s a significant risk with minimal upside considering the low rates of capital gains.
There’s nuances around things like divorce, but people overlook just how tax advantaged traditional investments currently are.
You're sort of right but for the wrong reasons. Early withdrawal penalty is not the only problem.
People only need to crack open the piggy bank when shit hits the fan. During those times (layoffs, etc.), the value of what's in the pig is probably depressed to begin with. So your hypothetical scenario is actually worse than you're suggesting, since you pay a 10% penalty on depreciated holdings.
If you legit need the 401k money, they do allow some circumstances for hardship withdrawal penalty free. You just have a higher tax liability that year.
But yes, don't use your 401k for general savings. Depending on your credit you are better off taking out a loan against it.
Yep, though the nuance is again important. Hardship is a tricky thing because being able to max out a credit card or get other loans including ones under terrible terms means many otherwise hardship situations don’t qualify.
Obviously, long term capital gains should be part of the equation but if you’re young in a lower tax bracket but a lucrative career, 401k can be a terrible financial decision.