I want you to do something. Log into your 401(k) right now, or just picture the last time you did. Look at that number at the top. It’s a good number, isn’t it? Bigger than it was a few years ago, and it feels like proof you’re doing this right, that you’re being responsible, that future-you is going to be just fine.
Now try to actually use a dollar of it.
You can’t. Not really, not without a penalty, not without a tax bill, and not for years, sometimes decades. That’s the part I want to talk about, because somewhere along the way we all got sold a story that a big locked-up retirement balance equals financial freedom. I don’t think it does. I think a number you can stare at but can’t touch is something else entirely.
A 401(k) Balance You Can Look At But Can’t Touch
Look at how a 401(k) treats you when you need the money before the government says you’re allowed to have it. Pull it out before age 59½ and the IRS tacks on a 10% penalty just for the privilege, and that’s on top of the regular income tax you already owe on every dollar. (Straight from the IRS.) I know this from first-hand experience because about seven years ago I cashed out my 401k and my 403b for a specific reason and had to pay a 10% penalty. (On my own money!)
Run the math. Say you need $50,000. By the time you cover the income tax and that extra 10% penalty, a typical earner walks away with somewhere around $34,000. You lost roughly a third of your own money for the crime of needing it early.
It’s your money. You earned it, you set it aside, your name is on the account. But you’re looking at it through glass. Any time you want to reach in and use it for the things money is actually for – an emergency, an opportunity, a kid in a bind – the system charges you a toll to touch what’s already yours.
And One Day They Make You Take It Out
Now the other end of it. Say you’re disciplined, you leave it alone like a good saver, you never touch it. The government won’t let you do that either.
The minute you turn 73, they start forcing money out of the account whether you need it or not. They’re called required minimum distributions, and every dollar that comes out is taxable income that year. Take out too little, or skip it, and you get hit with an excise penalty of 25% of what you were supposed to withdraw. (Also straight from the IRS.)
So that’s both ends covered. Take your money out early, you get a penalty. Leave it in too long, you get a penalty. An account that punishes you for getting in early and punishes you for staying too long isn’t something you own and control. It’s something that owns a piece of you.
The Tax Bill You’re Letting Someone Else Set
Now, the defense you always hear goes like this. Sure the money’s locked up, but look at the tax break. You put money in before taxes, let it grow, and you’ll pay the tax later in retirement when you’re in a lower bracket. Smart, right?
Maybe. But read that last part again: you’ll pay the tax later. A 401(k) doesn’t erase your taxes, it postpones them. Every dollar you defer today is a bet that the rate on that money, decades from now, will be lower than it is right now.
Nobody can promise you that. Not your advisor, not your accountant, and for sure not the people who actually set the rates.
And let me be fair, because I want this honest and not just loud. The question isn’t whether taxes have always gone up, because they haven’t. The top federal rate was over 90% back in the 1950s and it’s 37% today, so rates clearly move both directions.
That’s not the point. The point is who’s holding the steering wheel. When you defer, you hand the authority to set the tax rate on thirty years of your savings over to whatever Congress is in power when you finally get to spend it. And Congress has a long history of changing the deal after people already built their plans around it.
Want proof it happens? Social Security benefits used to be completely tax-free. Then in 1983 the government decided up to half of your benefit could be counted as taxable income, and in 1993 they raised that to as much as 85% of it. And the income lines that decide who gets hit were never adjusted for inflation, so the net keeps dragging in more regular people every year.
You can watch that happen in the numbers. In 1994, only about 12% of all the Social Security money paid out across the country actually got taxed. By 2022 it was more than 38%. Same promise everyone was given, rewritten decade by decade.
That’s the real bet a 401(k) asks you to make, and it isn’t a bet on the market. It’s a bet on how politicians will behave thirty years from now. And based on how they’ve handled it so far, betting they’ll suddenly start working in your favor is not a bet I’d make.
The Golden Cage of the “Responsible” 401(k)
So why is this cage so hard to spot? Because most of the golden cages I talk about, you can at least feel the pull of the shiny thing – the bigger title or the nicer house or the lifestyle. Somewhere deep down you know you’re chasing something. This one doesn’t feel like chasing anything. It feels like being a responsible grown-up.
I mean, think about it. Nobody has ever felt embarrassed about maxing out their 401(k). You don’t sit there in April going, man, I really overdid the responsibility thing this year. Just the opposite. You feel good about it, disciplined even, like you finally did the smart, buttoned-up, mature thing your dad and your accountant and every money guy on TV all told you to do. That feeling, that little glow of finally doing this right, that’s the gold. So is the employer match, and the tax break in April, and the balance ticking up a little every time you log in.
Now look at what you actually agreed to while you were feeling so responsible. You can’t get to the money without a penalty, you’ll be forced to drain it on a clock you didn’t set, and the tax bill waiting at the end gets handed to a room full of people in Washington who’ll never know your name. That’s the cage. And you walked into it proud of yourself.
I teach something I call the Five Freedoms – energy, money, time, choice, and purpose. Two of them, the freedom over your own money and the freedom to choose what you do with it, you signed both away the day you locked everything inside that account. And you didn’t get conned into it in some dark alley, either. You did it on purpose, with a smile, because somebody told you it was the smart and responsible move and handed you a tax deduction for it, and you said thank you.
So that’s the cage. Dressed up as the responsible thing, applauded by everybody you know, and it still costs you control of your own money. The gold is the lie.
What Control Actually Looks Like
Now, before you think I’m just up here throwing rocks, let me tell you where I stood. I believed all of this. I did the 401(k) thing for years because that’s what responsible people did, that’s what I’d been told my whole life, and I never once stopped to ask who actually held the keys to my own money. It took me a long time, and a few hard lessons, to start asking better questions.
When I did, this is the kind of thing I found, and it’s what I use now. A properly structured, dividend-paying whole life policy from a strong mutual insurer works almost backwards from a 401(k). The cash value grows at a guaranteed minimum, so it doesn’t ride the roller coaster every time the market sneezes, and it can also earn dividends. Those dividends aren’t guaranteed, of course, but the strongest mutual companies have paid them every year for more than a century.
The growth isn’t taxed year to year. And when you want to use the money, you borrow against it, any time, for anything, with no 10% penalty, no credit check, and nobody asking why. The loan does charge interest, and an unpaid loan comes out of the death benefit down the road, so it isn’t magic, it’s just built in your favor instead of against you. Done right and kept in force under today’s tax law, the growth can pass to your family income-tax-free, which means in a lot of cases nobody – not you and not your kids – ever pays income tax on it.
Compare that to the locked box. One account you can reach into whenever life actually happens. The other charges you to touch your own money and tells you when you’re allowed to have it. That’s the difference between an asset you own and an asset that owns you.
Words of Wisdom
There’s an old proverb that fits this almost too well.
“The prudent see danger and take refuge, but the simple keep going and pay the penalty.” – Proverb 27:12
The prudent person looks down the road, sees what’s coming, and adjusts. The simple one just keeps marching in the direction everybody else is marching, never asking where it actually leads, and pays for it at the end. And notice the word the proverb picks for what the simple one pays. The penalty. After everything we just covered, that word ought to land a little differently now.
What To Do This Week
So this week, ask yourself one thing. Stop staring at the balance for a second and answer the only question that really matters about any pile of money you’re building: can I get to it, on my terms, when I need it, without asking permission or paying a toll? If the honest answer is no, then whatever else that account is, it isn’t freedom.
I’m not telling you to torch your 401(k) this afternoon. I’m telling you to stop assuming it’s the whole answer just because everybody said so. (I’ve spent this whole month on what freedom actually costs, from the business that quietly owns its owner to why freedom was never about doing whatever you want. This is the money version of the same lie.)
If you want to see whether a different approach fits your situation, go talk to the person I trust with mine. My partner Mark Willis at Lake Growth Financial will sit down with you for a free consultation, no pressure, just a straight conversation about how it works. You can set it up at therealjasonduncan.com/bankonyourself.
And if you’d rather start by talking through your bigger picture with me first, book a call and we’ll get into it at therealjasonduncan.com/talk.
Your money should answer to you. Not to a withdrawal schedule the government picked for you, and not to a tax rate some future Congress hasn’t even written yet.
You’ve been staring at that locked box long enough. Go get the key.
– The Real Jason Duncan
NOTE: A quick, honest note: I’m not a financial advisor, and this isn’t financial, tax, or legal advice. It’s my opinion and my own experience, meant to make you think, not to tell you what to do with your money. Everybody’s situation is different, so before you change anything, sit down with a qualified financial, tax, or legal professional who knows yours.