The Ugly Side of Tax Deferred Accounts

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People often think that tax-deferred accounts, such as 401(k)s and 457 plans, are the best thing to hit the investment world. And, while there certainly are good things about tax-deferred plans, there’s such a thing as too much of a good thing!   

If you have all of your financial assets in tax-deferred accounts, for example, this can lead to trouble later on down the road, which is why you should avoid putting all your money into these types of accounts.

Potential Problems

One of the problems that could come up when you have too much money in tax-deferred accounts is that a withdrawal could end up bumping you into a higher tax bracket. This could mean that you find yourself paying a whole lot more than expected on the money you withdraw.

Another issue that can come up is that, in some cases, each time you make a withdrawal, it could potentially cause a larger chunk of your social security income to be taxed. Basically, if your withdrawals too greatly increase your “other income,” this could lead to more taxation of your Social Security income.

Something else to keep in mind is that you want to be diverse in your investments, which means not socking all your money away into tax-deferred accounts.

Avoiding Issues

Obviously, you will want to avoid the problems that can pop up with having too much money in tax-deferred accounts and with relying on them too heavily.

To help you avoid these issues and to ensure your investments are healthy and diverse, consider working with a qualified accountant and/or investment adviser.

By doing so, you can make your investments a true asset to your life and to your finances, instead of yet another thing that you have to worry about.