Are Retirement Accounts Flawed?

Daniel Penzing
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You’ll find a range of responses when you ask people about the flaws associated with retirement accounts. Some people will say that there are no flaws, while others will argue that retirement accounts only benefit a privileged few.

The truth is partially in both arguments. It’s true that what you’ll get from a retirement account will vary based on your profession, what you’ve contributed, and what you might need to take out. While you might be able to walk away with some really good amounts from retirement accounts, you probably won’t be able to retire as early as you’d like.

Think of it this way – a retirement account won’t get you one millimeter closer to retirement. It just makes it easier to retire with funds if you’ve contributed to a retirement account for the majority of your working career.

There is no blanket answer for this question—it’s different for everyone. There are some people who are in a relatively low tax bracket and it makes more sense to use traditional retirement accounts because you can contribute a lower amount and still get the same value. This is especially the case if you don’t have any other investments.

What's the Real Issue?

When it comes to tax savings, retirement accounts provide some pretty sweet benefits. If you can contribute to a 401(k) or an Individual Retirement Account (IRA), you can reduce your taxable income. The government will reward you for retirement savings by making all or part of your contribution tax deductible.

But it’s not just the tax deductions you get on your 401(k) contributions that make these accounts so attractive. You can also defer tax on any investment gains and slowly move your money to income-producing investments.

Since a 401(k) is considered an “above the line” tax deduction, you may be able to reduce your adjusted gross income for financial aid calculations and deduct your contributions from other income tax calculations.