Watch This Before Maxing Out Your 401K
Craig Wear, a CFP, warns high earners that maxing out pre-tax retirement accounts creates future tax liabilities through required minimum distributions, higher Medicare premiums, and taxable Social Security. He suggests Roth conversions and after-tax investments as alternatives to consider before making large contributions.
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Hey, this is Craig Weir again. Look, before you do anything else today, let me be very clear about who this video is for. First of all, it is not for people early in their careers. It's not for people just getting started saving money or those with small or kind of modest retirement balances. This video is for business owners, it's for high earners and it's for people in their 50s, 60s and 70s. Anyone already sitting on significant tax deferred balance in IRAs, 401ks or your own company's SEP plan. So if that's you and you're about to make a large year end contribution to that solo 401k or your SEP IRA, please watch this before you write the check. Because what feels like a smart tax move today, even if it's what your CPA is suggesting, could be creating a very expensive problem for you in the future. I've had a financial Planning businesses for 42 years when I had my other practice where we did asset management and more the detailed personal financial planning stuff. Every, every December, business owners from our area or across the country kind of have the same conversation. They call their CPA and say, gosh, we've had a good year. How do I reduce my taxes before year end so I don't have to make such a large end of the year IRA IRS payment? And the answer almost includes the CPA telling them, well, you need to max out your solo 401k, you need to add more to your SEP IRA or take another pre tax deduction. And look, I understand why, I'm a business owner too. And it's very tempting when you can go make a huge contribution into a plan and save a bunch of taxes. But it's very logical, it's clean, it works on paper. You just write a check, you save taxes, you feel smart. But here's the problem. You're actually not saving taxes, you're only delaying them. And sometimes you're delaying them into a nightmare. Trust me, we've, we've, we've built an entire business off of proving this and every single day that what I'm telling you is just not my opinion. It's what we've proved mathematically over and over and over again. Most people think, well look, if I put 50,000 into my SEP IRA, I just save a huge amount of taxes. No, you didn't really save the tax, you postponed it. And that tax doesn't disappear, it shows up later through required minimum distributions that are forced on you that maybe are going to take you into higher tax brackets, you'll see more of your Social Security become taxable. You're going to have higher Medicare premiums, almost without a doubt. And you're going to leave larger tax bills for your spouse and potentially for your heirs later. In fact, every dollar you defer today comes back as a future taxable income with interest. And when enough of those dollars stack up, you don't own an ira, you own a future tax problem. Business owners are uniquely vulnerable to this because your income is often uneven. You have highly profitable in your later years. And so what happens is you just start dumping large contributions into that retirement plan during your highest earning years and suddenly you're sitting at 65, 70 years old with this giant tax deferred balance and very little flexibility. So you tried to avoid taxes when you were earning, but you accidentally trapped yourself into paying them later. When you really want the freedom, you're stuck behind the taxes. You're deferred your business taxes, but at the wrong strategic cost. So here's the part that most CPAs really don't even think about, because they're not really paid to think about this. They're looking at answering the question, doing the job. How do I save you tax today? And here it is. A large portion of that retirement account already belongs to the irs. Not emotionally, not politically, but mathematically. And if you have a large tax deferred account, a meaningful portion of that money is just deferred taxes. And yet you're paying investment fees on it, advisor fees, you've got platform costs you're literally paying every year to manage money that you're eventually going to hand back to the government. And the more you pile into these pre tax accounts, the more of your future wealth you're managing on behalf of the irs. So instead of asking how do I lower my taxes this year? Maybe a different way to think about it is to ask, okay, so how do I lower the total amount of taxes I'm going to pay over my lifetime? And that's not the same question, is it as how do I lower my taxes this year? But because sometimes the answer is not another contribution. I know that's mind blowing, but we've seen it at, we've seen it help in real life with just so many people. Sometimes it's rethinking how much tax deferred money you already have, building tax free buckets instead and using Roth conversion strategies or investing in after tax assets to preserve flexibility or potentially even give you tax benefits. This doesn't mean never contribute again. It just means Stop contributing blindly into an account that is likely to cause you really big problems down the road. We see this every day. Every year, over a thousand clients come to us for resolution to this big problem. And we're able to prove to them what I'm telling you as true and we're able to help them put this into action. But let me be clear. I'm not saying never use a solo 401k and stop listening to your CPA. I'm not saying never fund that SEP IRA. These can be powerful tools, but they're tools. They're not default settings. If you understand the analogy, if you're early in your career, then maybe doing more of that makes tremendous sense. I'm still a big proponent of doing the Roth 401k or Roth as opposed. But during your early years. But, but if you're late in your career and you're in and already highly tax deferred, you're blindly just piling more and more money into the same buckets that might feel like tax savings, but really they're, they're just a tax bomb. You know, it's really tempting to go with the illusion that I'm saving taxes or to kind of think about the common thoughts of, well, you're just better to defer it to the very end for as long as you possibly can. I can't tell you how many times we've heard that. And then we come back with our reports and people see, oh gosh, I did this all wrong. I just want to catch you hopefully before you write that last check. And what's going to happen is you're going to go to your CPA with this newfound information and your cpa, you're going to say, hey, I saw this guy on YouTube that said that I probably should not write this big check. And your cpa, CPA is going to be, well, you're going to be at too high of a tax bracket. You definitely shouldn't not do it. You need the tax deduction. All that's going to do is demonstrate to you the myopic nature of that industry. My own cpa. After reading my book and seeing the success we've had in helping people and understanding it, they've come to the conclusion, gosh, she said to me, I even feel guilty talking to people about making larger contributions. And in my opinion, she should, because kind of they have now the knowledge that we've proven that doing that over and over, especially later in your career, is a big problem. Before you write the check, before you instruct your CPA or accountant what you're going to do. And before you max out one more year's contributions, I want you to just ask yourself three questions. How much of my retirement money is actually mine after tax? Am Am I reducing this year's taxes or increasing my future taxes? Am I solving a short term problem while creating a long term one? Because in retirement, taxes aren't just a line item, they're one of the largest risks to your lifestyle. And the smartest thing you can do now right now might not be contributing more. It might be actually thinking better about the decisions that you're making. Click some of the links below. We can get you some great information if you want to kind of go through this a little bit more in detail. I appreciate you listening. Give a like to the channel and if you're not following, hey, for goodness sake, follow along. New stuff like this comes out. You'll be the first to know. Take care. Have a great day. God bless.
