Money Mastery Coaching

Is your CPA Right about Contributing to a 401K?

Is contributing to your 401K and IRA a good tax savings strategy? No. And here’s why.

We are at the beginning of 2023. You may be in the season where you are collecting receipts, cleaning up your books, and preparing your budget for your final tax bill for 2022. At this stage of the game, many accountants will make a recommendation to max out your IRA and 401K contributions to “save” you money on your tax bill in April.

As an eighteen-year personal finance expert and founder of Money Mastery Coaching, I’d like to argue that government-sponsored qualified plans like IRAs and 401ks are destructive to most small business owners. Especially early on, these investments can be catastrophic because they exchange what you think is a tax savings for a tax deferral, and you introduce market risk while eliminating CRUCIAL cash liquidity.

Let me explain.

At the suggestion of their accountant, say a business owner maxes out their IRA contribution at $6,500 and then puts $66,000 into their 401k. (1)

That’s $72,500 going into government plans, with almost zero flexibility to liquidate that money before age 59-½.

A few months later, they wonder why they don\’t have cash in the bank available to fund their business; like to pay for employee costs, unexpected expenses, or during a season with a lull in cash flow. 

Because of the reduced liquidity, they are forced to take on additional debt with a business line of credit; or personal loans. They don’t get their student loans paid down because they’ve contributed to these qualified plans that are government controlled, which then eliminates their liquidity. Now their money is at risk in the market as well. So there’s additional stress. They wonder, “what’s happening with my money?! It’s declined in value!”

It’s the fault of the lazy tax preparer not to understand the characteristics of these vehicles and the fact that they’re not saving you money.

They’re deferring the tax costs into the future to an unknown tax rate. Today, we know what the tax rate is, but 40 years from now, we don’t know what the tax rate will be; it could be much higher. 

These IRA and 401K plans are sold as individual retirement accounts. They are not actually an account; they are tax-benefited agreements with the government that say you can avoid paying tax today, but you’ll have to pay it in the future, and the only thing you can do with the money is invest it in the stock market.  In fact, what’s worse, is the government is not legally allowed to invest in the stock market directly, but once you partner with them, they are indirectly allowed to invest there through you.  You see, about 30% of the money in your plan is actually theirs, and now you are their new investment manager. Yikes, right?!

I often wonder why people misunderstand IRAs and 401Ks. Here’s the truth about these programs.

  • The Individual Retirement Arrangement or IRA (tax code 408(a)) and the 401k are the tax codes that set the rules for your plan.  It’s a partnership with the IRS, which dictates the rules, limitations, and tax penalties if you don’t follow the rules. 
  • You first have to have a brokerage account, which implies you’re good with investing money in the stock, bond, and mutual fund markets.
  • Then we add this tax law around that account that gives you a tax deduction when you make the contribution, but you don’t get to touch it till age 59-½, or you will be taxed an extra 10%.
  • And oh, by the way, you can’t borrow against it. It’s not an asset that can be collateralized. You can’t go to a bank and say, “I have $100,000 in a 401k; will you lend me $50,000”?  They won’t do it because it’s not an asset. It’s not yours.  You are just the beneficiary.

You are trying to do the right thing by setting money aside for your future retirement but making the mistake of using vehicles that create massive restrictions.

You can cause yourself financial harm because of the misunderstanding of what’s happening within these products. People think IRAs are things. They are not things. They are tax codes that go around the thing, which is the brokerage account, and all the volatility that comes with that. 

I see this all the time. Service-based business owners, like chiropractors and dentists, are letting their fears about taxes cause them to make these ill-timed decisions, which then creates additional problems of lack of cash, which compounds debt. Then you are balancing like you’re on a teeter-totter of investments on one side, balanced out with unnecessary debt on the other side. You never get off of the up-and-down game without feeling like someone will get hurt. And I know from experience, this path of decisions, you are the one who will get hurt.


Let me ask you,

Do you have access to enough cash in your business? 

Are IRAs or 401Ks destroying your future? 

Are they really good things to have your money in? 

If the answer to these questions makes your stomach roll, read about how a client couple of mine was in this exact situation and what they did to eliminate the volatility of the market while increasing their monthly cash flow.

The IRA dilemma.

I took on a new client (a married couple in their early 30s) three years ago. They were 50/50 owners of a chiropractic practice in Florida, and based on recommendations from their CPA, they set up a 401k. Both partners put in $25,000 of their earnings, and the business contributed another $25,000. So for two years, they followed this plan, and they put $100,000 each into the company-sponsored 401K plan. 

When they started coaching with me, they said, “Wade, we really don’t understand what this is. It’s confusing to us. We don’t really like the stock market, but that’s where our money is. We don’t know who’s managing it or how it works. What do we do with this? What are the possibilities?”

I said, “Well, do you have a good relationship with the CPA? Do you have direct contact with whoever’s administering the 401K?”

They responded, “ Yeah.”

I replied, “Why don’t you ask them for a report of how it has performed and what find out what the costs are?”

A few weeks later, they received a report that said, “You’ve each deposited $100,000; you’ve had an increase of $13,000. Your costs have been $1,500 a quarter to administer the plan.”

So their net gain at that point in time was $3,000 – two years later. Then they just got their next bill. So they owed another $1,500. Their net gain was actually $1,500. All while losing $200,000 of liquidity. 

They said, “We actually really like real estate. We’re good at our business; it’s going quite well.  We want to be able to invest in some rental real estate. We want to be able to support people who need good housing, and we wanted to have a place we could go and stay on the beach.” 

They asked, “How do we get out of this?”

I coached them, “The good and bad is that COVID is happening right now. So the government has opened up an opportunity to get up to $100,000 per person out of your IRA or 401 K plans without the typical 10% tax penalty.  Plus, your total taxes on that withdrawal can be spread over 3 years instead of being due all at once.

With careful execution, they followed up with a plan with great success!  

  • They took 100% of their money from their government-sponsored IRA and 401K programs and spread the taxes over three years. 
  • Even though their tax rate had gone up from 25% to 35%, they did eliminate the 10% early withdrawal tax penalty. They got their money out of jail. 
  • They invested in Florida real estate, and it’s now a cash-flowing property. 
  • The market has appreciated dramatically. Their gains have been significantly higher with their real estate investment, as opposed to having it in the stock market with their 401K.  
  • Plus, instead of their gains being taxed at their ordinary tax rate of 35%, they will only be taxed at the lower capital gain rate of 15%.  That is a HUGE benefit of investing outside these government-sponsored plans.

What should you do about taxes now that you know IRAs and 401Ks aren’t the easy-fix solutions you were told they were?

1. Ask better questions.
We have an entire blog post dedicated to the questions you should be asking your accountant and financial coach regarding these investment opportunities. 

2. Know the Rules!
Use these new resources to educate yourself about the characteristics of the agreements you are making. You have to understand the limitations associated with it in exchange for the possible advantages that come. Are you willing to accept not having access to your money?

3. Work with me!
I’ve helped hundreds of service-based business owners, like chiropractors and other service-based business owners, to create clarity and simplicity with their financial plans. You can experience peace of mind and stability with your financial plan. 

Contact me to see which financial coaching program is right for you:  


(1) Reference:
Scroll to Top
Skip to content