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Grant Cardone says a 401(k) is just a way ‘to be trapped for 30 years.’ Why he dissed America’s most popular retirement savings tool

Grant Cardone says a 401(k) is just a way ‘to be trapped for 30 years.’ Why he dissed America’s most popular retirement savings tool
Grant Cardone says a 401(k) is just a way ‘to be trapped for 30 years.’ Why he dissed America’s most popular retirement savings tool

The 401(k) is often celebrated as America’s financial sacred cow. At the end of December 2023, 70 million active participants in the program held assets worth $7.4 trillion in total across 710,000 plans, according to the Investment Company Institute.

With so many Americans relying on this program to secure their financial future, it’s rare to see criticisms of the program. However, real estate mogul Grant Cardone did precisely that in a recent interview with YouTuber Vlad TV.

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“It’s a way for you to be trapped for 30 years,” Cardone said, referring to the program. Here’s why the prolific investor isn’t a fan of this popular tax-shelter.

Penalties and inflation

According to Cardone, savers socking away cash in a 401(k) are in handcuffs for several decades because they face severe penalties for withdrawing the cash early.

For a normal withdrawal, savers must be 59 ½ years of age or older. Early withdrawals before then could incur a 10% penalty from the Internal Revenue Service (IRS), but there are exceptions to that rule, including for buying a house, medical emergencies and military duty.

Another issue with the program, according to Cardone, is inflation. “If [inflation] continues — and it will, because we will continue to print money — you could literally lose 100% of the value of your 401(k) simply by the cost of goods going up and the purchasing power of your dollar going down.”

However, all assets, including Cardone’s real estate portfolio, are subject to the same inflation. And a simple low-cost index fund invested in the S&P 500 has historically outpaced inflation. The average annualized return of the S&P 500 in the last 10 years has been 12.69%, while inflation only exceeded 5% in 2022 (when the year’s average hit 8%) in the same time period. Put simply, investors who deploy their 401(k) funds into index funds generally outperform inflation and expand their purchasing power over time.

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Cardone’s biggest gripe with the 401(k) program is taxation. He believes taxes are likely to rise over time which means investors face a higher tax bill when they eventually access the funds in their 401(k).

“I believe that Wall Street and the IRS got together and said, ‘Hey, we want to capture this money for long periods of time and we’ll benefit you by hammering these people [on taxes],’” he said. Cardone points to the Biden administration’s efforts to raise capital gains taxes as an example.

However, it’s difficult to predict tax policy over decades as different administrations tend to have different tax policies. Historically, taxes for American individuals and corporations have steadily declined. The top marginal tax rate for individuals has dropped from 94% in 1944 to 37% in 2024. And capital gains taxes have declined from 35% in the 1970s to 20% in 2023, according to information services firm Wolters Kluwer.

It’s also worth noting that the 401(k) is designed to be a retirement account. That means most people are expected to start withdrawing money from this account after they reach the age of retirement. Withdrawals are taxed at the individual tax rate, but a retired individual without ordinary income is likely to be in a lower tax bracket.

So while your money may be “trapped” for decades, for the average American, that might not be such a bad thing. Because as tends to go, that cash can be quite productive in confinement.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.