Fri Dec 20 2024, by Tyler Gardner

If You've Been Taught That Investing in a 401k is a Scam, Here's What You Need to Know

I'm Tyler, a former financial advisor and portfolio manager, creating financial content for free to help you make informed decisions without the cost.

1. The Power of Pre-Tax Contributions

If you invest $10,000 in a pre-tax 401k and it grows at 8% over the next 40 years, you will have approximately $217,000. After accounting for a 25% effective tax rate, you would be left with around $162,000.

2. The Brokerage Account Comparison

If you opted to invest that same $10,000 in a brokerage account, the deferred tax is taken upfront. Therefore, your investment starts at $7,500. If that amount grows over 40 years at the same 8%, you would still end up with $162,000.

3. Accounting for Capital Gains Taxes

However, now you owe capital gains taxes, which we will assume is 15%. This would reduce your final amount from $162,000 to about $139,000.

4. The 401k Tax Advantage

Thus, investing directly in a 401k offers a $23,000 tax advantage. Moreover, this doesn’t even consider the potential for an employer match, making the decision to invest in a 401k a no-brainer.

Next time someone claims that a 401k is a scam, I encourage you to dig deeper into their claims and ask what they're really selling. I assure you, this perspective doesn’t reflect the truth.

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