Thursday, February 10, 2005

My Views on the 401K

401k s are offered by for profit corporations for their employees to "invest" for their financial future. There are many laws and stipulations that come with it as the government has designed it to be part of your retirment strategy therefore are penalties for general withdrawals. In addition, your company has its own benefits added to it.

You can find more about the 401K although I suggest you to be critical of what to accept as each source has its own agenda:

My general principle is put in enough for your employer to match. If they ask that you put up 5% and they will match up to that dollar for dollar or $.50 for every dollar you put up then it is at least 50% - 100% ROI or RETURN ON INVESTMENT with minimal effort.

My retirment plan is to invest in real estate (as I am more familiar with it) which provides me from 20% to Infinite ROI (when I take all my cash out). This is reviewed in RK book "Who Took My Money?". Basically one of the issues with 401k is that most people use it heavily to build long term wealth. Most 401k constrict the investments to mainly paper assets at the expense of profitable ventures in small business or real estate.

The more power you have to choose in your investments the greater the opportunity that you can make money work for you. Most financial advice revolves around mutual funds, stocks and other paper assets but I know that it is for those who want to be comfortable in 25+ years. For myself I see that I want to be free in 10 so I look for higher returns (aka tax liens or other real estate ventures). It is more stable and provide greater returns. Some are even tax free if you invest through a self directed IRA!

Educate yourself and formulate a plan that supports YOU and YOUR DREAMS!


guardianx said...

hi wolf- nice site guess what i picked you to be my mentor :) that is right now i will be on lurker mode so please post educational informations :) ..

side question when u purchase the home upstate did u do the repair job yourself? or hire the day laborer to do it for you.

Abundance & Success said...


I do coach people on the side.

Home upstate was done by contractors. Again it is about setting up a team. I know my strengths and weaknesses and take the appropriate action.

Abundance & Success said...

Posted on the Rich Dad site:

Why I Don't Like 401(k)'s

The 401(k) continues to be a hot topic. So, I thought I'd summarize the points I talk about in one of the seminars I do.

The Three Reasons Why Not to Do a 401(k)'s and The Two Reasons Why You Might Want To

First of all, with most 401(k) plans you are locked into certain investments. These are generally set up so that you win if the stock market goes up. If it goes down, or goes sideways you lose. (There are strategies to protect your position in your pension plans, but it does convert the tax deferred income into taxable income.)

#2 - The main reason that people use 401(k), or any tax deferred vehicle, is that they anticipate that they will pay less tax in the future. Like Robert K says - you can have one of three types of plans - a plan to be poor, a plan to be middle class or a plan to be rich. If you have a plan to be poor, then a tax deferred pension plan makes sense. You will make less money in the future, so it makes sense. But, no one I know personally or professionally has a plan to be poor. My clients all make more money each year then they did the year before. So, paying tax later is a bad idea.

#3 - If you were to invest the money you put in your 401(k) into paper assets, you would have portfolio income. Portfolio income is generally taxed at 15% federal rate (dividends and capital gains). Ordinary income is taxed at 35%. If you invested outside of the pension plan, you would pay 15%. But, if you put money in your pension plan and then pull it out later, you have ordinary income - 35%. are more than doubling your tax by using a 401(k). There is one time that this might make sense...if you have a plan to be poor.

Two reasons that a 401(kl) plan might make sense:

#1 - If your employer is matching a portion of your contribution with additional funds, you'll want to get the extra bonus. Free money! That's generally a good thing.

#2 - If you're young enough, the tax deferral aspect will make up the tax rate difference. That' because you have the time value of money working for you. If you're 25, it might make sense to use a tax deferral plan. If you're 55, it probably does not make sense.

And, just for the record - I LOVE tax free plans such as the ROTH plan. I'll be starting a series on my website (taxloopholes com) on some strategies for making use of the ROTH. Meanwhile, if you have a chance to set up a ROTH - do it! You have to be in the game to take advantage of the strategies.

Best of luck!

Diane Kennedy