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Thread: 401K : is it a total fraud

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  1. #1
    Join Date
    May 2008

    Default 401K : is it a total fraud


    I have a few questions about 401K.
    Wondering if 401K is a net negative for an employee.

    Assume the following

    Employee contribution : $ 5000
    Employer contribution : $ 2500

    Total value of 401K Now : $ 4000 (due to stock market loss)
    If I take a distribution, I have to pay taxes(20%) as well as 10% pre-payment penalty ie

    Take Home : $ 4000 - $ 800 - $ 400 = $ 2800 even though
    the 401K had a loss. Why is that ? Also see, if Employee had not contributed anything into 401K but just paid tax on $ 5000, it would have resulted in the higher amount = $ 4000 since only tax is paid.

    So it looks like probably 401K contributions have contributed to less inflation and also in the process stealing our money.
    - Is it a total fraud ?
    - Also why pay penalty and tax when 401K is under loss. I don't know if this is true, probably someone more knowledgeable can comment.
    Last edited by sishya; 04-30-10 at 02:34 PM.

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