Financial expert Robert Kiyosaki, the famous author of “Rich Dad, Poor Dad,” has an opinion that may seem unpopular. Opinion on the issue: 401(k)s are “terrible” retirement plans. Why does America's most popular retirement plan seem like such a bad idea, according to Kiyosaki?
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In addition to the countless mistakes you can make with a 401(k), 401(k) plans have their own drawbacks that make them unsuitable for many people. Read below to learn about these biggest drawbacks, according to Mr. Kiyosaki's team at Rich Dad Blog.
401(k)s are the most popular retirement plan, but they have some important issues.
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High fees and low administration
The unfortunate truth is that 401(k) plans come with high administration fees. This will reduce income in the long run. According to the Rich Dad team, these fees are often hidden in legal jargon.
Fees include, but are not limited to, transaction fees, attorney fees, and bookkeeping fees. Mutual funds may also take back a percentage of your investment (usually 2%).
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Additionally, when you invest in a 401(k), you are limited in how you manage your money. It is not directly controlled by you and you are limited in what you can invest. You also don't have immediate access to your money without paying fees. Also, 401(k) plans have no insurance. That means your retirement account is completely wiped out in the event of a market crash.
Finally, Uncle Sam limits the amount you can invest. Contribution limits are set annually by the IRS and were recently announced to be $23,000 per year in 2024. If you want to donate more than that, you'll have to pay taxes and penalties.
Tax disadvantages of 401(k) plans
Another issue surrounding 401(k) plans comes down to taxes. 401(k)s are taxed at higher earned income tax rates as opposed to lower capital gains tax rates. You'll pay capital gains taxes on other types of investments, such as real estate and regular growth accounts. So why is it different from a 401(k)?
This is all thanks to the 1978 Revenue Act, which gave workers access to defer taxes until they withdraw funds from their plans, usually in retirement.
According to Rich Dad staff, the Revenue Act of 1978 was originally enacted for pension funds, and companies have a direct responsibility to pay you out of the funds you paid into. Contributions to a pension were thought to be equivalent to cash, but the problem is that in today's era, well-rounded pensions are relatively rare.
The false safety of employer matching
According to Kiyosaki's team, there is a misconception that matching with an employer is an advantage. Rich Dad staff say this is just an illusion of extra income.
Even if you don't have a 401(k), your employer is expected to pay you an equivalent amount. Also, your employer is only obligated to pay for your match if you opt-in. Finally, a vesting schedule may mean that the employer does not have to pay for the match at all. If an employee leaves the company before vesting, the employer's contributions will not be paid to the employee.
Finally, you cannot control the funds from your employer match.
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This article originally appeared on GOBankingRates.com: 'Rich Dad' Robert Kiyosaki reveals why 401(k) is a 'horrible' retirement plan
