Monday, August 10, 2015

A Tax Attorney on the 401k Plans: Just Sat No

Alan Anderson comments at the The Best Thing I Have Ever Read on 401Ks: Why Your 401K Is A Scam post:

It's great to hear this from Mr. Altucher. I've been a 401k plan tax attorney for many years and have slowly come to the same conclusion. These days, I tell anyone who comes to me for 401k plan advice to just say no. I myself participated to the max in every 401k plan offered to me. Now I wish I hadn't. As Mr. Altucher says, I now find myself over age 59&1/2 and in a higher tax bracket than when I contributed. That is reverse tax planning. Even worse, all my money is tied up in only what the 401k plan rules allow, mainly standard Wall Street investments. Sure, there are ways to get unconventional investments in single-participant 401k plans, but it is very difficult and fraught with risks. Plus, most of the large company 401k plans do not allow this. I have concluded that it is better to have total control over 70% of my savings than little control over 100%.

6 comments:

  1. I thought the point was you quit your job then accessed your 401k in the next tax period when your income was zip. or am i missing something obvious.

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    1. That's the theory but rarely the real world reality. Tax rates go up fast. How much do you need per year after retirement? Even if you can get by taking out $50,000 per year, the tax rate hits 25% after $37,500 of income. And when you are young and contributing, your effective tax rate can be quite low because you are often buying a house and have big interest deductions plus a few children. So for many people, they contribute when their effective rate is under 25% and then take it out when it's over 25% because by then, the house is paid for and the kids are gone. Plus, you will also have social security of maybe $24,000 per year on top of the $50k in retirement income, which makes some of the social security taxable. I cannot say that a 401k plan is never advantageous, especially if you get matching contributions and stay employed long enough for the match to vest, but my main point is that I don't like the controls and that when you really look at it hard, the tax benefits may not be sufficient to justify locking yourself into a life long partner with the State.

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  2. What about Roth 401Ks and Vanguard Index funds then backdooring that into a Roth IRA?

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    1. Roth is the worst of all if your investments go down, like mine always do. I bought gold ETFs in my IRA at $1,000 per ounce or less and when gold hit $1,900, I started thinking about doing a Roth conversion if the gold price fell. When gold fell to $1,500, I did the Roth conversion, meaning I voluntarily (and insanely in retrospect) reported ordinary income at $1,500 per ounce. Now what? Even though my initial gold investment at under $1,000 is still profitable, I screwed myself on the Roth.

      Now if you are lucky enough to be able to make a profit on Wall Street, which I agree for small investors means index funds or nothing, maybe you can make a Roth work, but you've still got the risk that if investments fall, the Roth is worse plus all the lifetime controls of having the State as your partner. Again, my thinking is at least 50% based on not wanting my investments tied up in the permitted Wall Street products. I would rather invest my money in private secured loans to friends and family and investing in local real estate and small businesses.

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  3. Your problem was not the Roth. It was your investment in one asset. You need to balance your portfolio so that one investment - real estate, domestic large cap stocks, precious metals, etc. - when one is up the other will be down. I have read the Economic Policy Journal long enough to know that he recommends gold - it has been down while stocks over the long run are up. Also, if you roll your IRA to a Roth and the market is down you can unroll it and get a tax refund. Check with your tax and investment advisor before you do anything like this. The Roth is a wonderful investment that does avoid taxes in the long run but you need to understand the tax rules and watch what you invest in. I do have some gold that I am holding at a loss - it will probably turn around when my stocks tank out - in the meantime I can sleep at night.

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    1. I didn't invest in just one asset, but not every IRA I have owns every asset type. I elected to convert the gold IRA. You are saying I should have done a partial conversion across all my IRAs. True enough in hindsight, but this is very cumbersome to do and track. Also, you only have until the following year to "un-roll" it. It's another example of what a hassle it is. I agree that if you are going to do IRAs, do a Roth, in most cases. However, diversifying investments is still no guarantee. I had a diversified portfolio in 2008 when the DOW fell from 14,000 to about 7,000. All of my investments in all categories were way down and stayed down for years. What if I had converted to a Roth when the DOW was 14,000?

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