The Check Story
Let’s assume that you call me one day and want to borrow $10,000. I hand you the check, but before you take it you are going to ask me two questions because you need to do your due diligence.
The first question you ask is, “How much interest are you going to charge me?”; and the second question is, “When do I have to pay you back?”.
Suppose I said to you, “I am doing fine right now and do not need the money, but there will come a day when I need it, and when I know how much I need we can figure out how much interest I need to charge you to get how much I need.”.
Would you cash that check? Probably not, but you are standing in line to do exactly that with the federal government in your qualified plan otherwise known as your 401(k), 403(b), or 457.
They did not say that you do not owe the tax; they simply said you can pay us later. But at what rate? Now that is the question.
Understand that Qualified Plans (401(k), etc.) do two things:
- They defer the tax, AND
- They defer the tax calculation
Ultimately, the impact these plans can have on your finances either positively or negatively depends upon several factors. The first and most fundamental of these is your understanding of the rules of the game and secondly, the strategy you use to play the game. Contact me if you want to understand the rules of the game.
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