More on 401k\'s

401k's	gjohnsit	12/27/2007 12:29:15 PM
I missed the discussion on it from last night, but I wanted to add my $.02 Remember this board back in 2002? Deflationists were a large and vocal group here. Now they are nearly extinct. The reason is because they failed to take into account something very important: negative real interest rates. The deflationists saw what had happened over the previous two yearswith stocks and bonds and decided that it was going to continue in thefuture. They were wrong, and now they are poor. With 401k's you have much the same situation. Peopleare looking at what 401k's have done in recent years and think this isgoing to continue. Those people are overlooking several important facts: 1) the aging population 2) unfunded liabilities 3) a world already saturated in dollars The revenue needs of the government are going to go up. They have twochoices: a) inflate away the problem, or b) raise taxes. I'm betting on c) both. Thereforeyou can bet that taxes will be higher in the future when it comes timeto get your money out of your 401k. Why pay higher taxes on the samemoney tomorrow, when you can pay lower taxes on the same money today?It doesn't make a lot of sense, unless your employer is matching yourfunds. Which brings me to another important aspect of the 401k: liquidity. If the government decided to raise taxes on your savings account nextweek by 50% you would simply withdraw your money in your savingsaccount tomorrow. The government's plan would fail because of it. But what if they wanted to raise taxes on your retirement savings by 50% next week? That's another story. Now IRA's are only semi-liquid. You can get your money out of themearly, but it will cost you some. However, you could still liquidateyour IRA before the taxes hit. 401k's are almost entirelyilliquid. The only way you can get your money out of a 401k is to quityour job first (as I have found out). In a bad economicenvironment, that is a no-go. Thus, unless you are already nearretirement, no one is going to liquidate their retirement savingsbefore the government raised taxes. It's a perfect target for future government revenue. It's a Trojan Horse.
RE: RE: 401k's	conga	12/27/2007 12:41:35 PM
i agree with everything you say before this statement: "Why pay higher taxes on the same money tomorrow, when you can pay lowertaxes on the same money today? It doesn't make a lot of sense, unlessyour employer is matching your funds." Most of the big public companies i know of are matching at least 50c on the dollar..so they still are and have been till now.. andas you know, tax deduction on the contributions,and tax deferral on thegrowth..for most of the population,they arent savy enought to dobetter..as long as your not getting your own company shares, someoneshow me where you are going to beate that growth and tax reduction anddeferral for 25 yrs........... yes, i agree, you are NOT going to bein a lower tax bracket for most people here......but why not perservethe asset thru your estate planning?
RE: RE: 401k's	gjohnsit	12/27/2007 12:56:15 PM
"for most of the population,they arent savy enought to do better." Yes, but does that really change my argument? A sheeple is a sheeple until they aren't. Hell, I invested tens of thousands into my 401k until I smartened up. Now I wish I hadn't, but I can't do anything about it without quiting my job. "someone show me where you are going to beate that growth and tax reduction and deferral for 25 yrs." A Roth IRA beats it. What's more, it is semi-liquid, rather than illiquid.
RE: yes, i like roth ira's too. your right.but...	conga	12/27/2007 1:18:48 PM
ihonestly havent figured it out but the major annual contributionlimitations of a roth severely limit the growth opportunities that willoffset the tax free nature of the distributions...? and i doubt most of us here have an agi of under 100k to do a tax free rollover....... ido see your points though............i would rather try to max out thegrowth.if you can plan it so you dont need this money to actually liveon, estate planning just may take care of the tax hit
RE: RE: 401k's	Mad Ludwig of Bearvaria	12/27/2007 1:21:16 PM
" A Roth IRA beats it. What's more, it is semi-liquid, rather than illiquid. " Most people paid well enough to do serious saving aren't eligible to contribute to Roth IRAs. Thoseeligible to contribute can only put in about 1/3 the amount that can becontributed to a 401(k), so if you don't have multiple decades toretirement or want your retirement savings to enable you to pay for atleast pet food that has not exceeded its "sell by" expiration date, youneed to contribute more than the limit allowed by IRA accounts. Itwill probably be increasingly found that the illiquidity of 401(k)sbased on the need to change employers will be less and less of aproblem as more and more people are fired, change jobs for a betteropportunity, experience a change of control at their employer thatallows them to move their 401(k) to an IRA, or see their job move toChina, India, Vietnam, or elsewhere offshore.
RE: RE: 401k's	gjohnsit	12/27/2007 1:29:53 PM
"Most people paid well enough to do serious saving aren't eligible to contribute to Roth IRAs. Those eligible to contribute can only put in about 1/3 the amount that can be contributed to a 401(k)..." You are talking about a minority of Americans. Probably something like the top 10% or less. Those people can afford to pay someone to invest for them. I'm not worried about that segment of society. I'm worried about the other 90%. The 90% that I live in.
RE: RE: 401k's	Mad Ludwig of Bearvaria	12/27/2007 1:08:29 PM
"Therefore you can bet that taxes will be higher in the future when itcomes time to get your money out of your 401k. Why pay higher taxes onthe same money tomorrow, when you can pay lower taxes on the same moneytoday? It doesn't make a lot of sense, unless your employer is matchingyour funds. " Even if marginal tax rates go up, which I agree islikely, you will not necessarily pay more taxes by deferring income ina 401(k). The "progressive" nature of income taxation means if youroverall income is lower in retirement, which for high paid workers whodon't save much outside a 401(k) is likely, the tax paid on 401(k)withdrawals will still be at a lower rate than it would have been iftaxed when earned. If you work in a high income tax state andplan to move to a low or no income tax state in retirement, a furthertax saving is possible. Roth 401(k)s let you pay income tax at the time of contribution, but result in tax free qualified distributions. Balancesin IRAs and 401(k)s don't count as money colleges expect you to use fortuition if you have children who might apply for tuition aid. Ifyou save outside a tax sheltered environment the money you could haveput in an IRA or 401(k), you will probably have to pay tax on gains,possibly at short rather than long term capital gain rates, every timeyou switch how the money is invested, which can make a 10% earlywithdrawal penalty look like a bargain.
RE: You are assuming that all else remains the same	gjohnsit	12/27/2007 1:24:53 PM
You are assuming that any future tax hike will be minor, not dramatic. You are assuming that future inflation will be manageable, not hyper-inflationary. You are assuming that the government isn't going to change the rules on you. Otherwise none of your statements apply. You might be right. I might be wrong. But I think the days of America's tomorrow looking something like todayare coming to an end, and there are plenty of reasons to believe it. Being locked into a 401k prevents you from reacting to a dramatic change in the economy.
RE: RE: 401k's	Arcturus	12/27/2007 3:24:00 PM
You give some anonymous fund manager your money for 35 years and expect to get it back? REALLY? He'sbeen churning it to increase fees, buying toxic waste and generallyhosing it against the wall whilst you've been going to work every day. Trust me - by the time you come to cash up - it will be long gone, and so will he.
RE: RE: 401k's	vitrofan	12/27/2007 8:28:13 PM
You give some anonymous fund manager your money for 35 years and expect to get it back? ...your money does not have to be in a 401k or IRA for that to happen...
RE: RE: 401k's	Arcturus	12/28/2007 12:52:36 PM
True enough. But it (employing many intermiediaries)sure helps to distance the punter from his cash. This money will largely have evaporated before the boomers can get their hands on it