Ordinary Income Taxation

One of the biggest disadvantages of a 401(k) plan is related to the taxes you have to pay when you withdraw your money. Everything you take out of a 401(k) plan is considered ordinary income and taxed accordingly, if not rolled over into another qualifying plan within a certain period of time.

If you are part of the category of people that pay higher taxes, if you want to withdraw money out of your account in the form of distributions, you could wind up paying considerably more than the current capital gains tax rate of 15 percent.