Whomp said:
I think you're giving bad advice.
You don't have to wait till you're 59 1/2 to withdraw from a IRA or Roth. If you retire early you can withdraw earlier.
You can also withdraw for first time home purchases and higher education costs.
Another point, who said you have to be conservative in retirement accounts? You can trade all you want in a IRA account so why wouldn't you want the tax free or tax deferred growth especially at a young age?
$600 tax break on a IRA would be a substantial return on a $4000 contribution and this doesn't even account for the returns made on investment.
On 401k's (or SEP's if you're self employed) you are way off. Company matching dollar for dollar is significant (100% return on investment). You can also withdraw shares of company stock through "net unrealized appreciation" is also a substantial benefit. Aside from my deferred comp this is one item that allows me to avoid my high tax rate.
A.) Show me a company that matches dollar for dollar ("100%") w/ the 401k. I know the NFL matches 2 for 1 (best around, that I know of), but realiistically we're talking about 5 or 6%. By IRS law, YOU can only contribute up to 15k a year, so we're not exactly talking about a 'pot of gold at the end of a rainbow', being gifted to you by your employer. Some may be higher than 5 or 6%, but the gov't gives 5% to it's spoiled-rotten federal employees, so let's be realistic here. Chump change.
B.) You cannot get an -input- tax benefit on BOTH the 401k and IRAs if you contribute to both. By default, my 401k contributions are tax deferred, thus whatever I put into an IRA is taxed up front.
C.) 401k plans don't make as much sense now as they did a few years ago, before the tax law changes. The benefit has been reduced. If you still want to get the max matching -sure, why not- percentage, but beyond that you can easily achieve higher yields (with investment-friendly tax laws) by investing the money elsewhere.
D.) I'm giving bad advice? You're the one talking about taking loans from a retirement account. That NEVER makes sense. What do you think it's interest free, even for 'special circumstances'? I've never heard any advisor or financial expert say anything to the contrary - that is, it's NEVER ideal. Nothing to see here, but a bunch or red tape. This only applies as an option for someone, if they suddenly find themself in the poor house.
E.) Where can you invest 401k money? Gov't securities (YAWN), bonds, and perhaps various flavors of stock funds, say common stock (S&P 500), or a small-cap fund, international stocks... and that's typically about it - at best. INDEX FUNDS... might as well tie my money up into real estate. Granted I'm actively shifting stuff around, but come on... it's pretty LAME.
F.) Of course you can go wild day-trading the money in your IRA. It's an investing account like any general one. The reason I said 'conservative', is because the simple fact of the matter is, if you take some losses in the precious IRA, guess what - you can't readily reinforce it, and attack again. The IRA account is like a 'glass investment' - careful! Don't break it! It's very delicate. To me, it just seems less flexible, less liquid, etc. Best to just pick good funds, and let it ride. SLOWLY, over time. I.e.... big deal. But yeah - it's not unbridled, thus I don't feel comfortable messing with it much. "Better be careful with what picks I invest in... because if I get it wrong, the account takes a hit, and I can't get back to par until next year, when I can contribute!" -Psychologically, it's an investing account with it's hands tied, that's how I think of it. If you want to go hog-wild with your IRA, fine. For me, that's just a bit awkward. Why bother anyway, since it's so relatively small to my general investing account - less leverage. Thus, the IRA is a 'novelty item', for retirement. Sure, I pick good funds... and pick specialty funds based on what the market will be doing, but whatever. Overall, it's not exactly blowing my mind with excitement.
G.) Early withdrawals... if you become disabled. Otherwise, you can wait 'til 59.5 like the rest of us. "Early retirement"... sure, but that doesn't mean you get some special dispensation to start making retirement account withdrawals. This is a pretty exotic idea... where are you getting this? I somehow think whatever it is - doesn't apply to me in any way. There may be 'highly special case' situations, but for normal people like me, no. Though... "I wish".
H.) Retirement accounts in general... even at max contributions (which I do - only for the fun of it, might as well, since I am a money-saving machine), these are nothing sexy. They give you a nice little 'novelty item' bonus, after you've busted your @ss working for 40-50 years, thus making most people feel they're "making a smart move". Maybe I'm sounding too harsh here, hey, like I said, I have them. I use the tools available. But, I FIRMLY believe the money can be more effectively used elsewhere, to achieve higher yeilds (yes, even after taxes). That being the case, you have to ask, "what's the point".
The point is... most people aren't like me. Like this guy right next to me.... he started putting like 15% of his paycheck into a 401k in 1997, set 85% of the allocation to common stock fund (S&P 500), and didn't even LOOK AT IT since, until I got to talking with him last week about it - we logged in and I gave him some pointers.
See, for most people, they'd rather work... DAY in, DAY out, like zombies, for 60-stinkin' years, and not even bother messing with the money they're spending their whole lives making in the first place. THEN... the focus suddenly gets lost, and shifts towards 'career', 'job', 'what I do for a living'... next thing you know, you're indoctrinated, and spending your whole life working... and you actually come to believe "that's what it's all about".
C'mon now. Think outside the box. Me? My sheer hatred of working for a living - like some slave to a grindstone, for some petty $20-30 bucks an hour, as MY LIFE slowly goes by... that drove me to consider 'what else is there'.
These accounts just aren't sexy, man. See, putting 2k shares on a couple of oils Wed. morning @ 10:30 EST when they squeezed (based on missed expectations), and making a quick $500 in 8 minutes, and then shorting as the prices inevitably fell in line with the fundies (as reported), for a quick thou in about 3/4 hour subsequently.... that's the way to go. That 'floats my boat'... not sitting at some desk, wasting my time, waiting for some stranger to come up so I can say, "how may I help you, SIR?"... or, waiting for some type-A personality boss to come around, pestering me.
To each their own. I'm one of the most 'un-indoctrinate-able' people around. So, Mister Panda, that's my approach. I dont' call it 'bad advice', I just call it the road less traveled... because most people just stay on the one they see right in front of them, that they were pointed down, that everybody else is on. For someone that is such a stingy bastard, I am prepared to 'risk' 'funny money', because that's simply the name of the game. It IS a game, really. You have to realize that. Then you detach from the emotion that money inspires, and you can go in and play. And it's not that hard to win. Hundreds... thousands. I haven't got to the millions yet (still a rookie), but I 'll keep you posted.
