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401K : is it a total fraud

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  • 401K : is it a total fraud

    Friends,

    I have a few questions about 401K.
    Wondering if 401K is a net negative for an employee.

    Assume the following

    Employee contribution : $ 5000
    Employer contribution : $ 2500

    Total value of 401K Now : $ 4000 (due to stock market loss)
    If I take a distribution, I have to pay taxes(20%) as well as 10% pre-payment penalty ie

    Take Home : $ 4000 - $ 800 - $ 400 = $ 2800 even though
    the 401K had a loss. Why is that ? Also see, if Employee had not contributed anything into 401K but just paid tax on $ 5000, it would have resulted in the higher amount = $ 4000 since only tax is paid.

    So it looks like probably 401K contributions have contributed to less inflation and also in the process stealing our money.
    - Is it a total fraud ?
    - Also why pay penalty and tax when 401K is under loss. I don't know if this is true, probably someone more knowledgeable can comment.
    Last edited by sishya; 04-30-10, 02:34 PM.

  • #2
    Re: 401K : is it a total fraud

    The fundamental shift from defined-benefit pensions to 401Ks was designed to...help employees? No, I don't think so.

    Regardless of how fiscally impossible some of these pensions became, 401ks were a way out. Now they're the rule. (They started as a tax dodge for upper management but failed to find favor there.)

    If you are the type of employee that enjoys personally investing your retirement funds, 401ks are great. That's a small percentage of the work force.

    401K's took a battering in the FIRE-induced crash. Think that's a coincidence? Of course pensions took a beating as well, primarily due to the fraudulent AAA ratings they bought in to.

    Safe harbors are your best bet. iTulipers can help there.

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    • #3
      Re: 401K : is it a total fraud

      I have a female cousin who I can't convince to cash out her 401k before it devalues down to zero..

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      • #4
        Re: 401K : is it a total fraud

        I had a $10k Roth IRA full of tech stocks back in 2000. It dropped to $4k. My tax guy figured out some way for me to close the account and take the loss as a miscellaneous deduction. I paid a 10% penalty for withdrawing the $4k but I saved ~$1500 in taxes by deducting the loss. You should ask your CPA if there's a way to write off the loss.

        -Jimmy

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        • #5
          Re: 401K : is it a total fraud

          Thanks, I will enquire. I don't have loss in my 401K or IRA, but only profit.
          So the above example is only a general blue collar worker's dilemma.

          It looks the whole 401K is like a carrot dangled in front of a donkey by it's rider. We will keep walking in the hope, we
          will someday get un-diminished value but it is not.

          I am slowly trying to move my 401K Money Market's to Rollover to IRA and put into DBA(agri) & Oil(??) & Gold(CEF/PHYS)
          But again when I want to liquidate them someday I will have to pay penalty and taxes.

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          • #6
            Re: 401K : is it a total fraud

            Originally posted by sishya View Post
            Thanks, I will enquire. I don't have loss in my 401K or IRA, but only profit.
            So the above example is only a general blue collar worker's dilemma.

            It looks the whole 401K is like a carrot dangled in front of a donkey by it's rider. We will keep walking in the hope, we
            will someday get un-diminished value but it is not.

            I am slowly trying to move my 401K Money Market's to Rollover to IRA and put into DBA(agri) & Oil(??) & Gold(CEF/PHYS)
            But again when I want to liquidate them someday I will have to pay penalty and taxes.
            My current 401k is mostly cash (some oil funds), so no losses.

            Whenever I changed jobs in the past, I always did a rollover to an IRA. My rollover IRAs are mostly cash, gold mining stocks and PRPFX. Overall in my pension accounts I am gaining about 8-10% a year since about 1998.

            Never owned a hi-tech stock (except getting it from an employer as ESPP and stock options and selling it immediately). And I live in the silly con valley and worked in hi-tech for most of my life. There is a saying attributed to Mark Twain that a goldmine is a hole in the ground with a liar on top. Most hi-tech companies are exactly that, but without the hole in the ground.
            медведь

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            • #7
              Re: 401K : is it a total fraud

              401K do have serious problems. At many companies the only choice is "Aggressive" or "Conservative".
              Aggressive is a mutual fund with high turn over. It is no protection against market cycles.
              Conservative is T-bonds and money market. No protection against inflation.
              They need to offer Gold, REIT, commodities.

              At my last company, I could get "self managed brokerage account" so I could buy anything through Fidelity.
              If you leave a company, roll over into IRA, then you can buy almost anything.

              Polish.

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              • #8
                Re: 401K : is it a total fraud

                A big problem with 401k is the balance between profits, dividends, and the number of retired people.
                Retirees want to collect dividends, not sell off their income stream.

                Even if all corporate profits became dividends for retired people, there would not
                be enough profit to give people a good income. This is analyzed in "What if Boomers can't Retire?" by Thornton Parker.
                His solution is for people to acquire non-wall street assets, like local businesses, low cost housing etc. I am not sure how workable this
                is. However, "wall street" companies are over invested, even the non-FIRE ones. Dividend yields are pathetic for the degree of risk involved.

                Polish

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                • #9
                  Re: 401K : is it a total fraud

                  Originally posted by Polish_Silver View Post
                  Dividend yields are pathetic for the degree of risk involved.

                  Polish
                  shhhh! don't ever, ever, ever say that to your real dow denier!

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                  • #10
                    Re: 401K : is it a total fraud

                    My 401-K strategy, which worked rather well, was to avoid stocks and growth in favor of security. I invested the whole thing in government bonds. That way you collect the employer match and the tax break on the contributions and you only lose 1% or so each year as the fund administration fee is above the interest. It is not a bad idea if you are in a high tax bracket and can move the money eventually to something better. HR was upset that everybody who talked to me followed the same path, and had the small yearly loss. They were even more upset when I showed them how the fees on the stock funds made significant gains virtually impossible and losses almost certain. Yet another naked emperor in our midst.

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