Tony Robbins explains how your retirement savings in 401(k) accounts aren't exactly tax-free

Millions of Americans rely on their 401(k) accounts to make ends meet after retirement. Not many people, however, are quite aware of how things work when the money is withdrawn. People are under the impression that this money would be tax-free, but an eminent author and economist has recently suggested otherwise. The money in those accounts may not be paid to beneficiaries in full, as the government could take a significant chunk as income tax.

Tony Robbins, an entrepreneur, author, and motivational speaker, as per a report in The US Sun, made the claim. In his new book Money: Master the Game, Robbins shared a conversation he had with a senior executive who had said that he was happy with his 401(k) account as it had a balance of $1 million. Little did they know that the government would take away a sizeable portion of that money as tax.

This is because 401(k) accounts are notably funded with pre-tax dollars. This means that contributions deducted from paychecks over the years are set aside, and then income taxes are applied. One could argue that this lowers one’s taxable income from the account at the proper time of withdrawal: 59 and 1/2 years old or later. However, if we had to factor in the federal and state tax laws, things would be much different.

While this means that the amount of money cut as taxes would vary from state to state. The report argues that those with $1 million in their 401(k) who decided to withdraw at 59 and 1/2 years old would owe around $360,000 in federal taxes. Factoring in state taxes, that amount can range from $360,000 to $493,000. In the worst-case scenario, one can lose almost half of what they have saved up in their retirement fund.

“With the record-breaking levels of debt we have accumulated, many experts say taxes will likely be raised on everyone over the course of time,” Robbins wrote. “In short, the percentage of your 401(k) balance that will actually be yours to spend is a complete unknown.” Taxes might even go up in the future, which means that it is possible to have even more drainage from their retirement fund.

“And if taxes go up from here, the slice of pie you get to eat gets smaller,” Robbins added. “It’s a spiraling effect because the less you get to keep and spend, the more you have to withdraw — the more you withdraw, the quicker you run out.” All of the above is based on the assumption that a beneficiary would only start withdrawing at 59 and a half years old. However, if a withdrawal is made before that, a 10% penalty fee would also apply.

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