Are you Pro or Against 401(k)?
Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesA recent article that I wrote on the BP blog received some criticism because I suggest that a 401(k) is one of the best ways to increase your net worth.
This strategy was criticized by a couple of readers and I thought I'd move the debate over here. So here's my argument:
A 401(k) allows you to invest and grow your net worth tax free. It reduces tax liability now, enabling you to have a huge portfolio to invest that will achieve outstanding returns for the lifetime of the account. In my opinion, this is absolutely critical and its a real shame that someone would forgo the opportunity to take advantage of this tool.
The main counterpoint to this thought process is that the funds are not available until 59.5, and that they are taxed when they are withdrawn.
What do you think? Would you rather build up a ton of net worth through the 401(k) or have less assets to manage, but make them usable sooner?
I vote for the 401(k) and increasing my total assets under my name as much and as rapidly as possible.
I'm pro 401(k) when there is an employee match on offer. No one who has an employee match through their employer should ever contribute less than that which is required to get the match; that is just giving away money.
As for the tax deferral question, I am personally more in favor of the Roth approach. Yes, my tax bracket is higher now than it will be after retirement. But I have no confidence that our current (pretty reasonable) brackets will still be in place in 25 years. To take advantage of a tool that eliminates future tax liability entirely strikes me as a very, very good bet.
More broadly, I have noticed that BiggerPockets is full of fanatics. Diversification is almost a foreign concept here, and there are quite a few people who will tell you that putting money into anything but real estate is foolish. I think some of those people are very, very sophisticated real estate investors who do this full-time and with great success, and that most if not all of the rest are fools.
I personally plan on working productively and earning a high income until after 59, and living WELL PAST 59, so the withdrawal issue is fine with me.
My first time posting , sorry if this isn't the main topic , but any commit would help ,
I'm trying to get my kid to invest in a 401k at work that matches 6% of there pay ---------
I know the right things to with a 401k ,,
1) --SO ---my kid refuses to invest in there 401k --------- I recommend that they invest the max which is 6% and 6% co max and at the end of year , take the money out , pay the tax and pently,fees , and you'll make out , as they can invest in a money market fund misus fee with little market ups and down .......
2)--- I'm I missing something ,
3) -- mybe with any luck they will leave it there for a house down payment or RETIREMENT
Thanks for any commits/advice
Joe jr
hi Joe
Correct me if I am wrong but are you suggesting to remove the invested money on a yearly basis and pay the penalty and tax on it?
This does not make any sense to me.why would you want to go that route as it defeats the whole purpose in investing in a company 401k plan.
Regards
Chris
Chris, taking the funds out early and paying the tax and penalty can make sense if there is a company match.
Say Joe's son puts in $1000 and his company matches for a total of $2000 invested.
At the end of the year he cashes it in and pays 10% penalty and 20% tax. He's left with $1400 after his own $1000 investment. No, not as good as the 100% return if he had not touched it, but better than not participating.
It goes against the spirit and full benefit of the company match, but it is still effective.
Hi Jon,
Thanks for clarifying for me. Are there Corporations out there that will match your contribution 100%? - say you put in 1k over 12 months, the Corp. will match it with 100% like your example.That to me is amazing!!!!
I see what you are saying in that if you have an opportunity to make a better return elsewhere pulling it out may make sense but then again you have lost opportunity costs to contend with as well.
me personally, I contribute heavily to my 401k as it A. gives me a nice reduction of my taxable income and B. diversifies me from just holding hard assets ( real estate)
regards,
chris
I have never had the luxury of having a 401K, as a federal employee we have a Thrift Savings Plan (TSP) with no fund matching. I would think that the fund matching from an employer would be seen as free money, sure it is just a percentage but anything is better than nothing (I know about the nothing). Even though I have never had a 401K I think I would contribute up to what my employer would match. Seems to me like a little savings account that even though I can't really access will be there when I retire.
TSP does have employer matching. They match dollar for dollar up to 5%. TSP also has the lowest expenses anywhere (0.03%, 3 cents per $100). This is because TSP uses forfeited money (from people leaving before their matches are fully vested) to pay down the plan's expense. TSP also offers a Roth option. The down side is the limited number of funds to invest in.
Just a thought about Roth IRAs for lower income folks...
For those with low incomes (teenagers who only work summers or college student who work part time), I suggest putting money into a Roth IRA. This may be their only opportunity to make tax free investments. Low earners typically have no tax liability, and when they contribute to an Roth, you're getting a tax free contribution, decades of tax free growth, and tax free withdraws in retirement. Can't beat that!
I have a co-worker who made a deal with his kids. For every dollar they contributed to a Roth IRA, he would pay them back from his cash.
What if you could grow the money that you would've put in your 401k faster than the 401k itself would grow it?
hi Joshua
You can have your 401k/ira in just about any security you chose, even real estate!
Can you give an example of what you mean?
Thx
Chris
@Scott Trench I think this is great topic for a discussion!
And lastly it’s Roth 401k. It allows you to pay taxes one time now and then invest tax-free forever! Who can give me any arguments why I should not invest in the tax-free environment???
My friend, you're putting in a LOT of faith into the government holding to their promises that your money will be free to withdraw tax free some 20-30-40 years into the future.
The people who made those promises will be long dead and gone by then, and the new Congress will be doing everything they can to grab all that juicy money just sitting there slightly out of their reach.
A Roth makes sense ONLY if you're in the lowest tax bracket already. Once you pass 20%, you'd be MUCH better off investing in a traditional IRA or 401k.
A bird in the hand (tax deduction TODAY) is much much much better than two birds in the bush, even if the Government promises they'll still be there waiting for you when needed.
Chris, taking the funds out early and paying the tax and penalty can make sense if there is a company match.
Say Joe's son puts in $1000 and his company matches for a total of $2000 invested.
At the end of the year he cashes it in and pays 10% penalty and 20% tax. He's left with $1400 after his own $1000 investment. No, not as good as the 100% return if he had not touched it, but better than not participating.
It goes against the spirit and full benefit of the company match, but it is still effective.
This likely won't work simply because of the vesting schedule.
They vary for each company, but generally it's a five year schedule.
So after one year, he only keeps 20% of the match.
Two years, 40%
Three years, 60%
Four years, 80%
Five years, 100%.
After five years the money the company matched becomes yours. If you bail any point prior, you lose some or most of the match.
@Scott Trench I think this is great topic for a discussion!
And lastly it’s Roth 401k. It allows you to pay taxes one time now and then invest tax-free forever! Who can give me any arguments why I should not invest in the tax-free environment???
My friend, you're putting in a LOT of faith into the government holding to their promises that your money will be free to withdraw tax free some 20-30-40 years into the future.
The people who made those promises will be long dead and gone by then, and the new Congress will be doing everything they can to grab all that juicy money just sitting there slightly out of their reach.
A Roth makes sense ONLY if you're in the lowest tax bracket already. Once you pass 20%, you'd be MUCH better off investing in a traditional IRA or 401k.
A bird in the hand (tax deduction TODAY) is much much much better than two birds in the bush, even if the Government promises they'll still be there waiting for you when needed.
Ken, you can't apply the same standard for everyone. Everyone's situation is different. I don't have a lot of faith in the government, but I think taxing Roth moneys will result in a revolution or something similar. And I'm not suggesting dumping all of your money into Roth, I like the tax-deferral as well now and I agree with you that having that bird (tax deduction today) is a nice thing to have. But using Roth as an additional vehicle certainly makes a lot of sense for some.
Chris, taking the funds out early and paying the tax and penalty can make sense if there is a company match.
Say Joe's son puts in $1000 and his company matches for a total of $2000 invested.
At the end of the year he cashes it in and pays 10% penalty and 20% tax. He's left with $1400 after his own $1000 investment. No, not as good as the 100% return if he had not touched it, but better than not participating.
It goes against the spirit and full benefit of the company match, but it is still effective.
This likely won't work simply because of the vesting schedule.
They vary for each company, but generally it's a five year schedule.
So after one year, he only keeps 20% of the match.
Two years, 40%
Three years, 60%
Four years, 80%
Five years, 100%.
After five years the money the company matched becomes yours. If you bail any point prior, you lose some or most of the match.
My company's plan vests immediately.
401K and other retirement accounts should be only a piece to the puzzle. It would be very boring if you only received a few pieces of mail every month.
Frank
I'm pro 401k including self-directed solo 401k with checkbook control.
It is a piece of the puzzle indeed. For retirement, I am planning 3 sources of income: 401k, RE, and a pension. In case one or two fail, I will still have a good source of income.
If I had to choose one, I would go for RE because you have the most control over it. You can always pull the equity and it would be tax free cash in your bank account in case of an emergency or opportunity.
401k plans are nice because they accumulate over time. Just not that exciting to manage like RE. I have seen some of my senior coworkers 401k accounts, the ones close to retirement. They can be a nice source of income if you contribute and invest wisely. But then there were people trying to retire soon after the crash and had about half their 401k balance gone!
3 or more is a good plan for me.
9 pages on an 6 month old thread, forgive me if this is repetitive. Anyone looking at 401k loans? That's what I did for down-payment on my last unit. 4.25% at 5 years, paying myself back each month while still making contributions to employer match. Curious how that will be received here. My 401K was getting larger than I am comfortable with in equities. This allowed a very simple solution that I will most likely repeat every 5 years.
Darin
9 pages on an 6 month old thread, forgive me if this is repetitive. Anyone looking at 401k loans? That's what I did for down-payment on my last unit. 4.25% at 5 years, paying myself back each month while still making contributions to employer match. Curious how that will be received here. My 401K was getting larger than I am comfortable with in equities. This allowed a very simple solution that I will most likely repeat every 5 years.
Darin
I took a 401k loan for down payment on my current home about 5 years ago. It's a nice option to have in your tool box.
I am into IRA 401K investing Jim Hitt at American IRA has over 300,000.00 under management (Google Him) and Dimtriy Fomichenko I am sure can handle all our needs.
I wholesale deals and buy renovate and flip and all of my people that have IRAs and 401Ks are happy.
9 pages on an 6 month old thread, forgive me if this is repetitive. Anyone looking at 401k loans? That's what I did for down-payment on my last unit. 4.25% at 5 years, paying myself back each month while still making contributions to employer match. Curious how that will be received here. My 401K was getting larger than I am comfortable with in equities. This allowed a very simple solution that I will most likely repeat every 5 years.
Darin
This is a great method. The only downside is that if you leave the company (either voluntarily or involuntarily), you have to either pay the principal back immediately or have the principal amount show up as a distribution in that year, subject to all applicable taxes and penalties.
I've used this method, but I am lucky in that my 401(k) plan administrator allows me to accelerate the loan payments back so that I can avoid the pay it or distribute it scenario if/when my job goes away. The shortest time period I could take the loan for was 5 years, but I am on track to pay it back within 2.
Unfortunately, the accelerated payments are pretty limited. Has to be a bank or certified check, not additional out of my pay check or just a personal check from me. Has to be for an exact multiple of the payments. Can't me more than once per month. Ugh.
Good job!
With an employer match that's substantial (say 50% or more) and offers index funds as options (in addition to others), I'm pro 401(k) solely for the match. For those who aren't trying to be the next Warren Buffett or Peter Lynch (in addition to being a W-2 employee, mom/dad, husband/wife, volunteer, etc.) at least the index fund will allow you to bet on the house. I put less weight into the tax advantages, as no one can guaranty today what the tax structure will be 20 or 30 years from now. I'm fairly certain it will be different than today, but have no idea to the extent or which codes.
The best thing a person can do is assess their current situation, their plans, their risk tolerance, etc. and make a decision to either invest in a 401(k) (or other retirement plan) or not. The best thing is, whether you elect to or elect not to, you can change your mind and election at a future date. :)
With an employer match that's substantial (say 50% or more) and offers index funds as options (in addition to others), I'm pro 401(k) solely for the match. For those who aren't trying to be the next Warren Buffett or Peter Lynch (in addition to being a W-2 employee, mom/dad, husband/wife, volunteer, etc.) at least the index fund will allow you to bet on the house. I put less weight into the tax advantages, as no one can guaranty today what the tax structure will be 20 or 30 years from now. I'm fairly certain it will be different than today, but have no idea to the extent or which codes.
The best thing a person can do is assess their current situation, their plans, their risk tolerance, etc. and make a decision to either invest in a 401(k) (or other retirement plan) or not. The best thing is, whether you elect to or elect not to, you can change your mind and election at a future date. :)
Agree on the matching part. If company matches it, you basically double your money for nothing. Even with a early withdrawal penalty (take 10% hit, not particularly recommend), you will still come up ahead.
