PBS Drops Another Bombshell: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

[OverVolt]

You do realize that if your employer matches contributions its still worth it even with the early withdrawal penalties right?

Yes

I'd take the penalties but what a dumb system.

 

[Exterous]

Yes

I'd take the penalties but what a dumb system.

*shrug* There are flaws but most of them are about companies not having good 401k options. The withdrawl dates and penalties I am ok with as a 401k is supposed to be for retirement. In exchange for holding that money for a long time the government agrees to give you tax advantageous rules. Carrot and stick. Don't like the rules then you can invest in a taxable or Roth account with much fewer restrictions. The government isn't forcing you to use their system and live 'on the razors edge'. It's better than no system and I think the fees probably keep Americans from raiding the plan to some extent

I'd like to see an option where you setup a retirement account tied to you and can have any employer contribute to it. That way you don't have to move accounts when you change jobs and can decide what fund to buy. I'd still keep the penalty though

 

[ciba]

Of course, there's also no mention of the fact that 401K's are tax free until the moment you withdraw, meaning decades worth of compound interest on those untaxed dollars adding significantly to your 401K retirement.

You only benefit from the tax deferral if your rate is lower in retirement. Do the math.

I personally think that taxes will be higher in my retirement (federal) but I may live in a state without income tax, so may accrue some benefit.

 

[stlc8tr]

You only benefit from the tax deferral if your rate is lower in retirement. Do the math.

I personally think that taxes will be higher in my retirement (federal) but I may live in a state without income tax, so may accrue some benefit.

It's essentially a bet on future tax rates.

Even if tax rates don't change, the fact that you're deferring taxes today at marginal rates for future taxes at effective rates should yield a small amount of savings.

And as you alluded to, moving to a no-tax state in retirement can also yield savings of over 9%.

 

[TallBill]

*shrug* There are flaws but most of them are about companies not having good 401k options. The withdrawl dates and penalties I am ok with as a 401k is supposed to be for retirement. In exchange for holding that money for a long time the government agrees to give you tax advantageous rules. Carrot and stick. Don't like the rules then you can invest in a taxable or Roth account with much fewer restrictions. The government isn't forcing you to use their system and live 'on the razors edge'. It's better than no system and I think the fees probably keep Americans from raiding the plan to some extent

I'd like to see an option where you setup a retirement account tied to you and can have any employer contribute to it. That way you don't have to move accounts when you change jobs and can decide what fund to buy. I'd still keep the penalty though

That would make too much sense.

 

[boomerang]

Hey, PBS is just doing its part to help further the agenda of the likes of Pelosi and her Democrat minions. That being that the average Joe is ill-equipped to handle his money and the government could do a better job. Ms. Pelosi has publicly stated this on at least three occasions.

Faced with cutting back spending or receiving more revenue, the Dem's take the low road and gamble on more revenue. Retirement accounts have staggering amounts of money in them. Money that the government could put to far better use and for the betterment of all - they'd like you to believe.

If this story gets legs, that's when to start worrying. The .gov can't accomplish what it desires anymore on its own, it needs the help of the lapdog media and PBS naturally, is more than willing to do its share.

The biggest obstacle to the progressive agenda is self-sufficiency. If the people take care of themselves the chances are too great that the people may trim the size of government. We may be seeing the start of a greater push towards government management of our retirement accounts. Imagine a country with an insolvent Social Security system and a jar full of IOU's in place of retirement accounts turned over for management by the government.

In the beginning, it will be voluntary.

 

[shadow9d9]

Hey, PBS is just doing its part to help further the agenda of the likes of Pelosi and her Democrat minions. That being that the average Joe is ill-equipped to handle his money and the government could do a better job. Ms. Pelosi has publicly stated this on at least three occasions.

Faced with cutting back spending or receiving more revenue, the Dem's take the low road and gamble on more revenue. Retirement accounts have staggering amounts of money in them. Money that the government could put to far better use and for the betterment of all - they'd like you to believe.

If this story gets legs, that's when to start worrying. The .gov can't accomplish what it desires anymore on its own, it needs the help of the lapdog media and PBS naturally, is more than willing to do its share.

The biggest obstacle to the progressive agenda is self-sufficiency. If the people take care of themselves the chances are too great that the people may trim the size of government. We may be seeing the start of a greater push towards government management of our retirement accounts. Imagine a country with an insolvent Social Security system and a jar full of IOU's in place of retirement accounts turned over for management by the government.

In the beginning, it will be voluntary.

You are right.. we definitely should have privatized SS and put it all in the stocks market prior to 2008... Let americans, noted brilliant investors and handlers of money be in control!

 

[Vdubchaos]

That isn't a very serious article. For one, doing basic research is a simple matter of responsibility, and generally if you're poor, sadly, part of the reason is because of bad decisions you made, not just the unfortunate circumstances you were brought up under.

Ohh really?

:twisted:

 

[Exterous]

You only benefit from the tax deferral if your rate is lower in retirement. Do the math.

Not sure how you get that. If your AGI is $60,000 a year and put $5k into a 401k you get ~$510,000 after 30 years and 7%. If you do post tax contributions you end up only putting in $3,750, or you choose to lose $1250 out of pocket in taxes. Either way you give up a potential $130,000 in retirement savings so your taxes could be lower, the same, or slightly higher and still come out ahead. I am not sure how much higher taxes would be in the future on $15,000 (4% SWR of $380,000) compared to $60,000. I doubt it would be significant enough to offset the benefits

 

[CLite]

You only benefit from the tax deferral if your rate is lower in retirement. Do the math.

I personally think that taxes will be higher in my retirement (federal) but I may live in a state without income tax, so may accrue some benefit.

If you do the math you realize that initially investing with untaxed money and then not having to pay taxes on realized gains every time you trade stocks is significantly better than the alternative. Ultimately you pay income taxes but even if income taxes are significantly higher in the future it does not overcome the ability to invest pre-tax dollars and not pay any taxes for the 40+ years until retirement.

Let's say I earn 10,000 and want to invest it. Post-tax I can invest say 7,000 and pre-tax I can invest 10,000, 8% return rate. Let's hypothesize that the tax rate increases from 30% to 50% linearly over the next 40 years and I pay taxes every year on my gains in the non-401k example. After 40 years in non-401k I have $47,833, and in the 401k example I reach a value of $234,625 that gets 50% taxed leaving me $117,312.

What I believe you may be thinking of is comparing 401k to Roth IRA. In such a comparison it does boil down to tax rate now versus tax rate in future. If you believe the tax rate in the future is higher then the Roth IRA is better. However, these 2 options are never going to be equivalent/worse to investing normally (i.e. investing post-tax dollars and getting taxed on gains every time you trade stock).

 

[First]

You only benefit from the tax deferral if your rate is lower in retirement. Do the math.

I personally think that taxes will be higher in my retirement (federal) but I may live in a state without income tax, so may accrue some benefit.

Huh? With all due respect, you don't understand the math. Your 401K money is taken out tax-free, your paycheck is only taxed after the 401k contribution is taken out; in other words, you enjoy years of compound interest on your 401k investments because they are never taxed (not until withdrawal, decades later). If they were taxed at the moment of the contribution you would lose out on boatloads of compound interest gains. Or, as another example, if 401k's were taxed like capital gains, you'd lose out even more on compound interest gains. Money has time value, so anything that delays a surcharge, tax, etc. puts extra money in your pocket. Finance 101.

 

[stlc8tr]

What I believe you may be thinking of is comparing 401k to Roth IRA. In such a comparison it does boil down to tax rate now versus tax rate in future. If you believe the tax rate in the future is higher then the Roth IRA is better. However, these 2 options are never going to be equivalent/worse to investing normally (i.e. investing post-tax dollars and getting taxed on gains every time you trade stock).

Yeah, I assume that he was comparing a traditional vehicle with a Roth vehicle (traditional & Roth are types of tax shelters whereas 401K and IRA are types of accounts).

It's hard to predict what future tax rates will be. Especially in 20 or 30 years. There are so many things that could happen. So it's best to have a mixture of traditional and Roth investments.

 

[OverVolt]

Huh? With all due respect, you don't understand the math. Your 401K money is taken out tax-free, your paycheck is only taxed after the 401k contribution is taken out; in other words, you enjoy years of compound interest on your 401k investments because they are never taxed (not until withdrawal, decades later). If they were taxed at the moment of the contribution you would lose out on boatloads of compound interest gains. Or, as another example, if 401k's were taxed like capital gains, you'd lose out even more on compound interest gains. Money has time value, so anything that delays a surcharge, tax, etc. puts extra money in your pocket. Finance 101.

And then the fees, or penalties and fees if you contribute too much now only to need it later for medical bills or something.