Avoid This Costly Retirement Account Mistake

Avoid This Costly Retirement Account Mistake

Key Take-aways from Avoid This Costly Retirement Account Mistake:

• Pre-tax savings help more when in higher tax brackets.

• Withdrawing early can cost dearly in penalties and taxes.  Try to avoid this costly retirement account mistake.

• Flexibility matters—don’t tie everything up in retirement accounts.

• The tax rates on long-term capital gains might beat ordinary income tax rates.

• Work with a planner to build the right retirement income mix, and hopefully avoid this costly retirement account mistake.

Avoid This Costly Retirement Account Mistake – Links

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Watch this episode (“Avoid This Costly Retirement Mistake”) on our YouTube Channel
Christine Benz Morningstar article: Can A Taxable Account Beat a 401(k)?

Avoid This Costly Retirement Account Mistake – Transcript

This is the transcript of the video “Avoid This Costly retirement Account Mistake”

I was, at the time that I started making these contributions to these retirement accounts… I was in the 10% tax bracket.

And so I put, I started putting $2,000 away into an IRA.

I couldn’t qualify for the company 401k plan. Because I had to be at the company for three years before I was even eligible to start making contributions! But I started contributing to an IRA.

I could put $2,000 away at a time.

And in the 10% tax bracket, I had a tax savings of $200.
Big whoop. Big deal.

A few years later as I got into the 401k and started making contributions, even in the 10% bracket, if I’m putting $6,000 away… at 10%, I’m saving $600 off of my taxes.

It didn’t really move the needle.

It wasn’t until a few years later, when I was in the 24% tax bracket, that saving money like this on a pre-tax basis became a very huge deal for me – and for other people who were going through the same kind of growth in their income.

Oh, and by the way… a few years later, my fiancé (now, my wife) and I both decided that we were going to buy a condo in Rockville Centre.

Uh, it was actually a co-op, it wasn’t even a condo in Rockville Centre.

But guess where all the money for the down payment came from?

It came from retirement accounts.

And so we had taxable income. And we had penalties that we had to pay. And it really, in hindsight, turned out to be a very stupid decision.

At the time, we were socking money away, on a pre-tax basis, in the 10%, 12% tax bracket.

It just didn’t make sense.

A lot of times when we were talking to folks. We’ll talk about things like this.

What kind of tax break are you going to get, by putting money into a retirement account? You might be better served by considering putting this money, or some of this money, into a taxable investment account.

At least then you’re not going to have any penalties if you decide to turn around and buy a home.

We all know today that, you know, if you’re a first time home buyer, it costs an arm AND a leg, to put together a down payment for a house.

If this money is tied up in a retirement account. It’s not going to be that easy to access.

So just some things to consider as you’re going through this.

Now, fast forward to today. We’re meeting folks who have the lion’s share – nearly all of their capital – tied up in retirement accounts.

They’re in IRAs, they’re in SEP accounts, they’re in 401Ks.
And they’ve got very little cash to invest or to do something with.

So they’re really in a tough spot. Because now… when they want to spend some of this money, it has to go through the tax filter. It has to come out of the retirement account.

So it’s going to come out as ordinary income, not capital gain.

This is really important to understand.

Most of their future income is going to be taxed at ordinary income.

Let me give you something to think about.

A married couple filing a joint tax return in 2025. If their income, their taxable income, is less than $96,500, they pay this much 0% in long-term capital gains taxes.

Again, their taxable income has to be below $96,500.

But what if your income is over that amount?

Well, married couples, filing jointly, can go up to $600,000 in taxable income.

And they are going to be taxed at a long-term capital gains rate of 15%.

That’s honestly pretty good, and it is likely lower than the ordinary income tax you would pay if you were taking money out of a retirement account.

Again, all the money that comes out of a retirement account as ordinary income.

It’s not until you have taxable income for people who are married, filing jointly in 2025 of over $600,000, over 600 grand, in taxable income, before you get to that 20% long-term capital gains rate.

So the answer to the question that Christine Benz posted in her Morningstar article…

“Taxable account versus 401k… what’s better?”

There is no cut and dried answer.

The recommendation should be “you need to work with a planner,” because every situation is going to be unique. And so you want to work with a planner who is going to figure out the optimal mix – for you.

That’s (probably) going to be a mix of ordinary income, and capital gains coming out.

All the more reason you should be speaking with a planner to help you sort through the math.

Thanks for watching “Avoid This Costly Retirement Account Mistake.”