patrick.net

Do you even have a 401k?

I'm 26. My 401k has a balance of about $80k. I also have an outstanding loan against the 401* for $15k or so.

Mine is growing like crazy, mostly because I get a fifty percent match.

If I didn't put money in the 401k, id just have it in another mutual fund, earning about the same.

When I'm 65, I will have much lower income than I do today. ill bet I'm not in a 35 percent marginal bracket then, so ill be taxed at a lower rate than I'm saving now as well.

Why would you NOT max out your 401k? I guess if you aren't getting any match it might make sense to put that money elsewhere, but I can think of zero other investments that do as well as a 401k with even a 20 percent match.

Oh, and in an emergency, you can take out a loan against the account and just pay yoursel interest as the only real penalty. You'd have to be in really terrible financial shape to need more than that kind of safety net provides.

I agree Armando. You'd need to have a perfect life to start saving for it. The penalties for withdrawing are just too heavy. After all, it is YOUR money. If they want to revoke your employer match for withdrawing early, that is fine. After all, your employer probably got more than $100 of benefits for matching your $100 from your pay check. There are incentives to sucker employees to "invest" their earnings.

You will be at the front lines to tank losses. I recently changed my contribution amount to 0%, and have been getting bugged by HR & Fidelity to change it back to at least 3%. They're also not too happy that all my 401k money is just sitting there, and not allotted into any funds. Had I left it in the fund, I'd have lost much money.

Every 401k has an all bonds fun, so its dumb to have assets in cash.

If you're getting at least a 20 percent match you can /ake a profit by maxing out your contribution and withdrawing immediately.

I doubt the people who are contributing 0 to their 401k actually have any other significant investments, or the income to max it out given the choice.

Kevin says

and in an emergency, you can take out a loan against the account and just pay yoursel interest as the only real penalty

You can screw yourself here if you should terminate the employment and not be able to repay the loan. Also loans have a slight tax disadvantage in that the "interest you pay yourself" will be taxed on the way out, though this is offset by the ability to push more money into the tax-deferred account than the annual limit.

The penalties for withdrawing are just too heavy

No they're not. The penalty is 10% on money that had escaped taxation at your top marginal rate. For people in the 28% bracket when putting money in, if they time their early withdrawal for when they have no other income their effective tax rate is a lot lower.

Say you put in $30,000 over 3 years, you've saved $8400 in taxes. Then you quit and rent a shack on Maui to contemplate your navel for a year and withdraw the $30,000 to live on. You'll be paying $5,679 in taxes, $3000 early penalty and $2,679 federal, for a net gain of almost $3000.

Some ripoff.

To answer the question, 401Ks are awesome. Always max your contribution to them. When I was working for the man 2000-2003 and 2006-2008 being a superbear I kept my money in the "cash" money market option. This avoided a lot of pain of losses that the usual 401K options give you.

What's also good about them is that when you change jobs you can rotate the funds into a self-directed tax-deferred trading account, complete with options and the ability to purchase bearish derivatives like SKF, FAZ, and SRS : )

My IRA did pretty good with SRS in 2008, LOL.

There's really one big benefit to 401k, and it's the pretax feature. We max out the full 32k and the employer match the. Full 32k. 64k in pretax at 28fed and 10 state is 28k in tax savings, by far the most costly program for th treasury. Would you rather start with 64k working capital or 36k?

The value of the 401k depends on your tax bracket and company match so it is natural different people see things differently. It's a heck of a lot easier to build wealth with pretax $$. You can't build wealth if the government takes them 40percent at a time.

Thanks for the thoughts guys.

My company matches 100% of the first 5% of your yearly salary one puts in the 401K yearly.
In my case the match would be around $2900 dollars if I contributed 5% of my salary.

Some co-workers have stated "I'm throwing money away by not maxing it out" , I disagree with this. Some people seem to have this view that the 401K is bullet proof. I see it a bit different, if the Fed had not bailed that mortgage backed securities market by buying up over a trillion dollars of it, 401Ks would be massively in the tank right now. With the 401K it would seem one is putting in all of the retirement eggs in one basket they just happen to be different colors.

Vain says

I agree Armando. You’d need to have a perfect life to start saving for it. The penalties for withdrawing are just too heavy. After all, it is YOUR money. If they want to revoke your employer match for withdrawing early, that is fine. After all, your employer probably got more than $100 of benefits for matching your $100 from your pay check. There are incentives to sucker employees to “invest” their earnings.
You will be at the front lines to tank losses. I recently changed my contribution amount to 0%, and have been getting bugged by HR & Fidelity to change it back to at least 3%. They’re also not too happy that all my 401k money is just sitting there, and not allotted into any funds. Had I left it in the fund, I’d have lost much money.

Vain,

I'm glad you see the same "perfect" life assumption is made when it comes to the overall benefits of 401ks. This is not a reasonable assumption given the unstable job market/economy that lies in the coming decades. If you ever have to withdraw from the 401K prior to eligibility then it turns into a bad deal unless you time it just right as Troy pointed out.

However, when one withdraws it's not usually in such a perfect rational scenario as Troy pointed out , one is usually desperate and needs the money. Tax rates , regulations, retirement age could all be changed in the future especially if you are young. The government will have to deal with the massive deficits sooner or later and the solution might impact 401ks negatively.

Everyone is saying the 401K is such a great system, I guess I'm just wary of it. My company also pushes very heavy for one to contribute , I think that they must be getting some benefit for them to be pushing the 401K so heavily as you state.

Why don't they just contribute the 5% of my salary to the 401K WITHOUT me having to put in any funds?

Kevin says

would you NOT max out your 401k? I guess if you aren’t getting any match it might make sense to put that money elsewhere, but I can think of zero other investments that do as well as a 401k with even a 20 p

Kevin I don't disagree with you on the growth aspects of the 401K system.

However what about the risk?

What if you get laid off and can't find a job and need to tap into your 401K system to pay your mortgage , as so many Americans are doing. At that point it has the potential to be a bad deal.

You sound like sophisticated investor, so I think you will do great in your future. However, I use the example of my coworkers who are loaded with student loan debt, car loan debt, credit card debt, mortgage debt and are still maxing out their 401Ks WTH?

I bet the yearly interest on the loans combined is probably higher than the return of the 401K. I also think my coworkers are a good representation of the debt most Americans carry.

I currently am saving for retirement, some of the money is in cash. Some of it is in accounts in my country of birth and some is invested here in the U.S in small business ventures. I am saving up to buy a house cash. I have a feeling real estate might get even cheaper in the next few years and am hoarding cash in hopes I can get some cheap properties cash. I am saving for retirement just not in the 401K my company keeps pushing.

The thing about 401(k)'s is the psychological wall of investing (I should trademarke that, huh?).

It comes out of the paycheck, the employer contributes a nominal amount and the tax savings are modest. But the fund grows without people feeling it, because they're not allowed to access it. It' a forced savings you can't touch, and for those people who can't save it's the best way to do it.

But get in a wreck & need some $ - you have to borrow from yourself. In addition to the amount that you're contributing, you're paying on a loan to yourself (double whammy). And lose your job, you have to decide whether to cash it out or roll it over. In this economy, people are raiding every investment that they have rather than get behind - or behinder.

One could argue that the money wouldn't have been there had the psychological wall of investing not been in place. But one could also argue that, if someone is going to break through that wall to save their finances or perform some menial task like eating or living indoors, the penalties should be decreased.

My point is that some people are so busy trying to live, the 401(k) is the least of the issue.

If your employer is matching 100%, that means you get a 100% return immediately - doesn't sound like a bad investment to me. Sure, there are strings attached but unless you are using a savings account/CD's you'll be risking your money no matter where you put it. The market has to tank pretty far to eliminate your gain. Over a 40 year period I don't think you'll lose. Now, if the employer is NOT matching (or it is a pittance) then sure put it in a Roth if you are eligible. You can always roll the dice and put it in some high quality real estate ;)

If you live beneath your means, you can easily fund a 401k/Roth and have money left over. Maybe you won't get that 60" plasma (or whatever the next k00l thing to come out) or drive an overpriced new car - but when you hit 50 you won't be kicking yourself contemplating how you are going to live off social security. Of course if you've been accustomed to living off credit and you have 60k in student loans, credit cards, etc this can be a painful change...

The only argument I have ever been able to come up with is: what if taxes are way higher when you are retired and withdrawing ?

But I find that highly unlikely. Because given the state of baby boomer finances (under-prepared for retirement), and the voting block that seniors represent, if taxes are much higher then, I could easily see some sort of tax break on say the first 50K (or inflated equivalent) for seniors.

Of course there are the conspiracy theorists that think the government will confiscate 401k accounts for the general fund and replace the funds with IOUs...After all, it is "idle wealth" isn't it?

Anything can happen if the Democrats ever get the majority they've had these last two years. How far of a leap is it "Oh those rich people have plenty of money let's tax the snot out of them" to "This other group of people were not given the chance to save for retirement let's spread the wealth that those who benefited from Life's Lottery around".

I am not a fan of republicans and they have many ugly warts ... I have to hold my nose in the voting booth - but elite liberal democrats are just plain scary when you take their ideas and stretch them out to their logical conclusions...If there was only something in the middle that didn't stank up the place so bad

EightBall .... I agree with your statement. Literally, nothing is off the table with the loony left. Argentina has in fact taken retirement accounts and replaced them with government IOUs, so there is a precedent. Socialism always looks for creative ways to fund their programs. Cutting programs usually is out of the question, so anywhere there are funds, I personally do not believe they are safe. Our government has confiscated "funds" in the past; FDR and his illegal grab of gold bullion from American citizens under stiff penalty of law.

Another aspect to consider re: 401Ks, IRAs, etc. is the "value" of the currency by the time you retire. What will it be? Inflation is the silent tax that few people consider, but it is very real. As the Government continues its reckless deficit spending, they will be forced to continue to print more and more paper money which will continue to erode the value of the U.S. dollar.

But Ray, the rightwing loonies are just as bad if not worse - they talk a good game but don't deliver and to get a lot of voters they tack into the extreme on social issues. If the republicans keep going further right and the democrats get pulled to the center, I might have to hold my nose and vote for them some day...

You get where you are going faster when you move forward - not left and right. The polarization makes us stand still and prevents forward progress. Please don't mistake this as a vote for progressives - it's just a new term for liberal ... progressive used to be a dirty word so they gave that up for liberal, now liberal is a dirty word and they call themselves progressives...

While the recent stock market hasn't been very kind to 401k holders, the early 20's is exactly when you should start thinking about starting a 401k plan. If you where to put 10k in your 401k at 21 and never contribute another dime, you would have more money in it than a 40 yr old putting 10k into the fund every year till they retired. That's the magic of compounding interest. I know when your young it hard to think about retiring. but if you could have a little forethought and start your 401k early, chances are you could retire in your early 50's, Wait a few years, and even retiring at 67 your balance doesn't look so favorable.

Vain says

I agree Armando. You’d need to have a perfect life to start saving for it.

There's the right attitude, why even bother saving at all, after all it will probably never amount to much, or you'll tap it for some emergency. Well I for one would rather have that option available to me for an emergency, if you don't save, it will not be there when you need it. Weather if be retirement or some other financial crisis.

Troy says

The penalties for withdrawing are just too heavy
No they’re not. The penalty is 10% on money that had escaped taxation at your top marginal rate. For people in the 28% bracket when putting money in, if they time their early withdrawal for when they have no other income their effective tax rate is a lot lower.
Say you put in $30,000 over 3 years, you’ve saved $8400 in taxes. Then you quit and rent a shack on Maui to contemplate your navel for a year and withdraw the $30,000 to live on. You’ll be paying $5,679 in taxes, $3000 early penalty and $2,679 federal, for a net gain of almost $3000.
Some ripoff.

I think your math is off. First you get a 10% penalty right off the top, that $3,000, then you get a 28% tax bill on the whole 30k, they do not deduct the penalty from the amount you owe, that makes $8,400, than the state gets there share, if you state wage tax is 8%, that's another $2400, total taxes on 30k, $13,800, leaving you with $16,200.

Just for the record, I am not arguing that people should not save for retirement in the future. I think people should be saving as much as possible for retirement.

The question I pose to myself most often is , "Is the 401K the right way to save". I'm fairly well educated and have a very stable job and am saving for retirement just not in 401K. I like to challenge conventional wisdom on some matters and the 401K is one of them.

Most of the individuals/families whom I have contact are under this assumption that if they contribute money to their 401K every year they will be set for retirement. That may or may not be the case, some as these same people have very heavy debt loads yet are still contributing to a 401K plan WTH?

I just think we as a nation need to take a step back and evaluate whether the 401K system will really be enough for people to retire on.

Techgommit For clarification, the penalty is there to really avoid income shifting from high tax bracket years to low tax bracket years.

Let's say business is good and bonus is 100K, leaving you at the 35% fed and 10% state tax bracket, putting 10K into the 401K saves 4K in federal and state income tax.

Let's say next year you decide not to work and your federal tax bracket is 10% and state tax bracket is 3% and you decide to withdraw the 10K you put in last year

penalty 1K
federal income tax 1K
state income tax 300
total 2,300

So you can play some games with income shifting even with the penalty in place.

TechGromit says

then you get a 28% tax bill on the whole 30k

The actual brackets in my example are 10% and 15% not 28%

they do not deduct the penalty from the amount you owe

Actually they do but I think the standard deduction exceeds that.

if you state wage tax is 8%

No state taxes 8% on $30,000 of income.

"The question I pose to myself most often is , “Is the 401K the right way to save”

It is absolutely without question the best way to save for most people (if you are serious about saving). All of your cons are minor compared to the huge benefits of 401K. Don't overthink things, everyone who makes good money maxes out their 401K. There are a lot of things to question and rethink, but this is not it. I can see where you are 21 and working a starting job where 401K does not make sense.

Investing pre-tax money on pre-tax returns will build your capital exponentially faster than post tax $$ and post tax returns. It's not even close. This is especially imporant once high income tax bracket takes hold. The side benefits are lowering the AGI which may effect your exemption phase out and other tax nuance. I say this even in the face of credit card debt, invest in your 401K first.

Maxing out means two things: Maxing out what the company will match or maxing out what the IRS allows pre-tax? At the minimum, at least max out what the company match, that is free money, most companies match a minimum 25% but reputable organizations match 100% or more. To the extent that it is possible, max out to what the IRS allows give the best results. Me and my wife is able to sock away and grow 500K+ in 401K at age 33 and 31. The post tax investments and post tax returns are way less successful.

Nomograph says

Instead of handing all that tax money over to the government, you get to keep it in your account, making money for you for 40 years.

The thing is I see no evidence of that in my account. It is just losing money. I've lost nearly all of the employer match and have pulled it from funds before it reaches over into my money.

SF ace says

Techgommit For clarification, the penalty is there to really avoid income shifting from high tax bracket years to low tax bracket years.
Let’s say business is good and bonus is 100K, leaving you at the 35% fed and 10% state tax bracket, putting 10K into the 401K saves 4K in federal and state income tax.
Let’s say next year you decide not to work and your federal tax bracket is 10% and state tax bracket is 3% and you decide to withdraw the 10K you put in last year
penalty 1K
federal income tax 1K
state income tax 300
total 2,300
So you can play some games with income shifting even with the penalty in place.

SF Ace, I've actually thought about doing this but have not sought for advice. I know that my 401k plan has some sort of rule where I can withdraw without the hefty penalties if the withdrawal were to either pay for education, medical expenses, or a primary residence.

I was thinking about maxing out my 401k (maximum IRS allowable) contribution now to get a bit lower tax. After I purchase a home, I will pull everything out of my 401k as I will then have interest expense to deduct.

What are your thoughts of such a move?

Your right about the tax bracket 10% taxes on the first 8,375 and 15% up to 34K, so your taxes would be 837.50 + 3243.75 = 4081.25 + the 10% early withdraw penalty adds another 3k to the total, so your looking at $7081.25 in taxes, not the $5679 amount in your example. (filing as a single adult) Another thing to remember is this money is considered income, so if you make 70k a year and you withdraw 50k from your 401k, it will be enough to get you into the next tax bracket.

Vain says

SF Ace, I’ve actually thought about doing this but have not sought for advice. I know that my 401k plan has some sort of rule where I can withdraw without the hefty penalties if the withdrawal were to either pay for education, medical expenses, or a primary residence.

I've done it for purchasing my primary residence. You can withdraw 10k without penalties, but you still pay income taxes on it. Anymore than 10k receives a penalty, so in my case I took out 20k for a down payment, paid 1k penalty on the second 10k and paid income taxes on the whole 20k.

Armando148 says

Most of the individuals/families whom I have contact are under this assumption that if they contribute money to their 401K every year they will be set for retirement. That may or may not be the case, some as these same people have very heavy debt loads yet are still contributing to a 401K plan WTH?

Depends on what they are putting away and how long they been doing it. I think most 401k's will not be enough to fund there retirement alone, but with social security and a 401k it can help meet there long term retirement financial goals. You also need to remember to invest your 401k money your withdrawing. I figured my own out, figuring a 20 year withdraw, the first 10 years or so, withdrawing the minimum allowable amounts each year, I was getting something like 150k a year, but by the 10th year, the amounts dropped to under 50k and quickly dropped to almost nothing the last 5 years. If you fail to properly invest the money you don't need to live in the first 5 years of so, you will be living out of a cardboard box the last 5 years. (provided you live that long)

Vain says

I’ve lost nearly all of the employer match and have pulled it from funds before it reaches over into my money.

This will happen. 401K plan offerings are investments not savings. There IS a difference.

If your plan doesn't have a cash / money-market option (with a boring return of 0.25% or so) then it is indeed a scam and you should not put one dollar in it.

I was like you when I came back to the US in mid-2000. I actually didn't elect to put money in the plan since I thought the market was going to crash, but after a couple of months a nice letter from the HR finance department reminded me of the corporate match and told me of the money market option. I invested in that 2000-2003 and again 2006-2008.

The Treasury actually stepped in and backstopped money market funds two years ago.

http://www.washingtontimes.com/news/2009/sep/19/geithner-ends-money-market-guarantee-program/

TechGromit says

I’ve done it for purchasing my primary residence. You can withdraw 10k without penalties, but you still pay income taxes on it. Anymore than 10k receives a penalty, so in my case I took out 20k for a down payment, paid 1k penalty on the second 10k and paid income taxes on the whole 20k.

TechGromit, which 401k administrator were you working with? And how does that process go? I can withdraw money now but with the market nowadays it's hard to buy a home. What if I pull my money out for a down payment but end up getting beat out by my competitors consistently?

For my situation, I really don't need the money in my 401k to purchase a home. I'd like to use it as an excuse to extract my money after the purchase.

TechGromit says

Your right about the tax bracket 10% taxes on the first 8,375 and 15% up to 34K, so your taxes would be 837.50 + 3243.75 = 4081.25 + the 10% early withdraw penalty adds another 3k to the total, so your looking at $7081.25 in taxes, not the $5679 amount in your example.

Does the person in this example not deserve the $3650 exemption? Will he forego the $5700 standard deduction?

so if you make 70k a year and you withdraw 50k from your 401k

Yes, that would be bad!

Vain says

TechGromit says

TechGromit, which 401k administrator were you working with? And how does that process go? I can withdraw money now but with the market nowadays it’s hard to buy a home. What if I pull my money out for a down payment but end up getting beat out by my competitors consistently?
For my situation, I really don’t need the money in my 401k to purchase a home. I’d like to use it as an excuse to extract my money after the purchase.

You need a signed sales contract / offer, you can't just withdraw the money and claim your going to buy a house. You need proof. I guess if the sales falls through, technically you could pocket the money, I don't know about that case. If I remember correct, I was issued a check minus the penalty amount which I brought with me to closing. Im pretty sure they didnt deduct any taxes, I had to set aside money for the end of the year to pay my tax bill.

Troy says

If your plan doesn’t have a cash / money-market option (with a boring return of 0.25% or so) then it is indeed a scam and you should not put one dollar in it.

Troy, you nailed it with your post as to why I'm not contributing. I understand that these are investments. I'm just taking precaution for now and plan to resume contributing later on in life - now is not the time for me. I haven't studied too much as to what Fidelity has to offer for my 401k. But I have since changed it to a fund that consists of Bonds only. It offers very low return but it's better than letting money sit there. I find it interesting though that the description for the Bond fund stated that this is for people who would like to take risk. Maybe to hedge against the risk and diversify is what they meant.

TechGromit says

You need a signed sales contract / offer, you can’t just withdraw the money and claim your going to buy a house. You need proof. I guess if the sales falls through, technically you could pocket the money, I don’t know about that case.

I will call Fidelity to find out details...

Vain says

SF ace says

Techgommit For clarification, the penalty is there to really avoid income shifting from high tax bracket years to low tax bracket years.
Let’s say business is good and bonus is 100K, leaving you at the 35% fed and 10% state tax bracket, putting 10K into the 401K saves 4K in federal and state income tax.
Let’s say next year you decide not to work and your federal tax bracket is 10% and state tax bracket is 3% and you decide to withdraw the 10K you put in last year
penalty 1K
federal income tax 1K
state income tax 300
total 2,300
So you can play some games with income shifting even with the penalty in place.

SF Ace, I’ve actually thought about doing this but have not sought for advice. I know that my 401k plan has some sort of rule where I can withdraw without the hefty penalties if the withdrawal were to either pay for education, medical expenses, or a primary residence.
I was thinking about maxing out my 401k (maximum IRS allowable) contribution now to get a bit lower tax. After I purchase a home, I will pull everything out of my 401k as I will then have interest expense to deduct.
What are your thoughts of such a move?

It depends,

In general, you should contribute at least as much the company will match. Whether you want to go beyond that depends on individual specific situation which includes tax bracket, plan for money and disposable savings. Generally, at my tax bracket, it is a no brainer.

You can withdraw 10K without penalty for a home, which is a great deal, but you do have to pay tax on it. Consider it a deferred bonus. Income shifting only works if you switch from high tax brackets to low tax brackets. I imagine that tax deduction from home ownership may put you in a lower tax bracket thus diluting the value of a 401K. It's still valuble, is it 25% valuable or 15% valuable?

In any case, under no curcumstance should you not max out what the employer match. I advise you at least max out what your company will match. If you truly want to save for retirement, just contribute and let it grow.

One of the best use of 401K is to buy REITS. In a REIT, there is no tax at the entity/REIT level. REIT's are required to distribute 90% of their income. After dividend distribution, there is no tax at the 401K level. This is reverse of double/triple taxation, this is zero taxation.

Why would you NOT max out your 401k?
If you're in the 35% marginal bracket, that may be true, but a rule of thumb for the rest of us (bear in mind that this does vary with age):
First, contribute to 401k up to maximum match (past employers of mine have matched first 6% of salary at 50 cents per dollar contributed)
Second, max out your Roth IRA. Contributions are taxed, but distributions (at retirement age) are TAX free. For the conspiracy theorists, the Roth IRA is the best deal around, so it may be the first to be attacked by the gubmint.
Then, max out the rest of your 401k. Only at this point can you figure out your marginal rate for buy vs. rent calculators -- don't be fooled by a REALTOR®!
Depending on your marginal rates YMMV.

TechGromit says

Depends on what they are putting away and how long they been doing it. I think most 401k’s will not be enough to fund there retirement alone, but with social security and a 401k it can help meet there long term retirement financial goals. You also need to remember to invest your 401k money your withdrawing. I figured my own out, figuring a 20 year withdraw, the first 10 years or so, withdrawing the minimum allowable amounts each year, I was getting something like 150k a year, but by the 10th year, the amounts dropped to under 50k and quickly dropped to almost nothing the last 5 years. If you fail to properly invest the money you don’t need to live in the first 5 years of so, you will be living out of a cardboard box the last 5 years. (provided you live that long)

TechGromit,

I appreciate the advice and scenario you give above. Clearly you are well versed on the topic of 401Ks.

I myself will probably not contribute to any type of 401K style plan. Unless my employer adds the option for ROTH IRA, but for some people it's probably a good idea to contribute to a 401K plan.

I myself am disciplined enough to save and look for alternative investments but some people may not have the time or desire to do so and for those the 401K plan is probably a good idea.

I believe investing in a 401K when one has debt other than mortgage debt is foolish.

Armando, after going through this thread, I now have allocated all my funds to Bonds, and have maximized my 401k to what my employer will match (6%). I will stop once the vested balance is $10,000. But it only works in my situation as I anticipate to purchase a home. Once I do reach the $10k mark, I will withdraw all $10k for home purchase, and will really have contributed $5k, and my employer contributing $5k as well. Of course there are taxes. If I do not purchase a home by the time I exceed $10k, I will stop my contributions, and reassess the 401k later in life.

Pros

Lowers your current pre-tax income and tax...
contributions are not taxed... deferred.

You own your investment and take it with
you, roll over to IRA account.

Bonds or bond funds are not low risk, at this point when long term rates are at their lowest in 40 years. If interest rates go up, the value of bonds will go down. Yes the current market value can be far below what was paid for bonds, although you are guaranteed a certain return if you hold bonds to maturity (very long term).

Above vain mentioned switching to bond (or a bond fund ?). He may have meant a money market fund. A money market fund is invested in short term securities such as treasury bills. That is where you risk is the lowest, but the yield also these days is very low.

If you're interested in "keeping your powder dry" so to speak, then money market probably makes more sense than bonds.

Armando148 says

What if you get laid off and can’t find a job and need to tap into your 401K system to pay your mortgage , as so many Americans are doing. At that point it has the potential to be a bad deal.

...then you withdraw with a 10% penalty, but at a lower tax bracket than you contributed. So you still win.

Seriously, it's REALLY hard to lose on a 401k.

Armando148 says

You sound like sophisticated investor, so I think you will do great in your future. However, I use the example of my coworkers who are loaded with student loan debt, car loan debt, credit card debt, mortgage debt and are still maxing out their 401Ks WTH?

Depends on your interest rates on those loans. If you're paying 15% on a credit card, you pay that off before you put money in the 401k. This is just basic mathematics.

EightBall says

Of course there are the conspiracy theorists that think the government will confiscate 401k accounts for the general fund and replace the funds with IOUs…After all, it is “idle wealth” isn’t it?

Depends on what the holdings are. If the money is going to productive stocks, it's a very good use of capital. if the money is going to companies that just sit on it, like the companies that just put gold in big vaults, then, well...

EBGuy says

If you’re in the 35% marginal bracket, that may be true, but a rule of thumb for the rest of us (bear in mind that this does vary with age):

Even at 28%, or 25%, it's hard to beat. Remember, you're paying 28% today, and when you withdraw it in the future you will probably NOT need as much annual income, so you'll have a lower effective rate.

Tax rates might go up, but they really can't go up much for the sub $100k a year (adjust for inflation, of course) crowd. There just isn't the political will to do it.

So, yeah, I'm pretty confident that anyone with a marginal rate over 25% is going to be better off maxing out now, and withdrawing later. I'm also pretty confident that the employer matches will outweigh any other investment opportunity for the next year or two at least.

Vain says

Armando, after going through this thread, I now have allocated all my funds to Bonds, and have maximized my 401k to what my employer will match (6%). I will stop once the vested balance is $10,000. But it only works in my situation as I anticipate to purchase a home. Once I do reach the $10k mark, I will withdraw all $10k for home purchase, and will really have contributed $5k, and my employer contributing $5k as well. Of course there are taxes. If I do not purchase a home by the time I exceed $10k, I will stop my contributions, and reassess the 401k later in life.

I've also been thinking about buying a home sometime in the future once the government exits the mortgage market and real estate market value plummets.

I might also consider putting in 2500 dollars so I can get the equal 2500 dollar match this is the max my employer will match. I anticipate leaving the employer in the next few years so I will be able to roll over to a self directed IRA which I'm comfortable with. I didn't know you could take 10K out for a house, it strikes me as a good deal.

EightBall says

Idle wealth is needed in the economy and needs to be taxed/confiscated.
401k money is idle wealth.
Therefore we should tax/confiscate 401ks.

By that logic, it doesn't matter if you have a 401K, IRA, or simply invest outside of any vehicle. So, why worry specifically about 401Ks?

I agree with Kevin. It's almost impossible to think of any logical reason not to invest in 401Ks if they are employer matched. Where else can you guarantee 50% return on day 1 of any investment? If you have outstanding debt, you need to find other places to cut because the power of compounding interest is so great that you have to invest in 401K when you are young.

If taxing idle wealth also means to tax savings accounts, then everyone's cash will be held else where and banks will no longer have deposits. It will cause chaos.

I don't own a home, have no dependents. The 401K was the only instrument I used to reduce my taxable income. What are others in my situation doing?

I'm socking my savings away in a 401K - there's sufficient choice for different investment allocation strategies, with the idea that I can tap into it if I absolutely have to. The employee match helps, but absent that I would still use the 401K to reduce my taxable income.