Should I stop my 401k?

[Millenial_Kid5K1]

$5000 in a 401k:
Worth up to $200,000 40 years from now, but you can't touch it before then, and that's really only $75,000 in 2017 dollars.

$5000 in a business:
Could easily be worth millions in a few years.

Ultimately it's up to you, but that's how I see it.

 

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[MJ DeMarco]

When you say 20% match, something tells me this is a you put in $1, they put in $.20 type of deal.

Still, that's an immediate 20% return.

I wouldn't overlook that so fast, especially if she's still in the exploratory phase and is also addressing debt.

 

[JAJT]

I agree with the others - keep it until it makes obvious sense to stop it. If you are uncertain, then it doesn't make obvious sense yet to stop.

Saving in general is a good idea regardless of your job/business situation and they are paying you to do it right now.

 

[CareCPA]

Greetings Laura,

I would least roll it into a Roth IRA. When you do that, you won't get charged any pre-tax dollars, but will grow over time. But since we're in the Millionaire Fastlane Forum, don't rely on that as a source of retirement. If you want to cash that out, your're probably going to get taxed very heavily when you withdraw, say probably up to 40%.

I think that's my two cents, but I would urge you to cross reference my information with a local "trusted" tax or financial advisor.

If it's a traditional 401k, you will absolutely pay taxes rolling it into a Roth IRA. You would need to roll it into a traditional IRA for it to be a non-taxable event.

 

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[CareCPA]

So hopefully I won't get kicked out for saying this, but I haven't read the books yet. I came to this forum because it is a business forum full of people taking action on their ideas, and building the lives they want. There is a lot of pessimism and bad math in this thread though. I think if the market tanks enough that you've lost a significant portion of your invested money, then you'll have bigger societal issues than the few thousand you have socked away in your 401k.

Maybe @MJ DeMarco says in his books to never invest. I'll get around to reading the books soon. But I have some faith that the largest international companies on the market that I'm invested in probably know a thing or two about business. Do you really think Johnson & Johnson or Disney are going to tank right to $0? They have enough in physical assets alone that they could sell some and float the company for a while. People are not going to stop buying movies and toilet paper anytime soon. I'm not sure I would compare the free market to gambling. Who do you think the house is in that scenario, the government? That actually is a little too paranoid for my tastes.

Am I going to put every last dollar I have in the market? No, I'm going to invest in myself, but I'm also going to sock some away for the future. If I manage to completely screw up my business, at least I have a rainy day fund to fall back on. And a 10% penalty on a 401k withdrawal in a lower tax bracket is less than I would pay in income taxes on it today, so I still come out ahead.

If you guys want to completely avoid the market, that's your choice. But do it because you have a solid use for the money, not because of some of the fear-mongering going on here. If you have questions on the numbers, I'm happy to give some advice. My crystal ball is a little fuzzy at the moment, so I'm going to leave the speculating on when the global economy is going to collapse to the others here, who seem to know something I don't.

 

[CareCPA]

It's now qualified money, so it's inaccessible. The only exceptions are reaching age 59.5, or using substantially equal periodic payments under IRS code 72(t).

If you do decide to take it without using either method, you get penalized 10%.

And, in both cases, with or without penalty, you're taxed by the percentage of whatever your income is in the year you accessed it, without limit or exception.

You give me a dollar, I give you back $1.20. That's an immediate 20%.​

You give me a dollar, I give you back $1.20, but with these rules attached? Your true value is $1.08 before you play ball with Uncle Sam.​

Or, that year that your business didn't turn out as well as you hoped, and you have no income? Roll it into a Roth and utilize your standard deduction and personal exemption. Tax-free rollover, no penalty.
Once it's in the Roth, it's now counted as contributions, and contributions can be withdrawn tax-free (subject, in some cases, to a 5-year seasoning period which is a little beyond the scope here). My point being, there may be more options to access without the 72t or penalty.

 

[CareCPA]

I guess I'm more pessimistic than most people on here because I got burnt last year. Put $5500 into a Roth IRA, then took it out a few months later to fund my business aspirations. Immediately lost $570(but also gained 200). Same thing would have happened with a 401K. If I'd done the same thing with a regular fund, I'd have only lost $70(profiting $130).

I'll stick with regular investing when I've got money not allocated for a business venture so that I can use it as I see fit, thank you very much.

Why? Non-rollover (i.e. regular) contributions to a Roth IRA can be withdrawn with no tax penalty. Earnings cannot.

 

[jon.a]

What's the company match? I still get stuck on going for the company match. I'm sure that someone smarter will chime in.

 

[Waspy]

Surely if you are concerned you can spread the risk.

Drop it to 5%?

 

[CareCPA]

It also doesn't have to be either/or. If you aren't starting a capital-intensive business, and you have enough to live on, then why stop it? Take the tax deferral benefits.
When you get to the point you need capital, then worry about it.

 

[Kinematic]

It really boils down to your personal risk tolerance. For me (and this is very slowlane), I max out my 401k and IRA every year. I see it as a hedge against never succeeding in my own business ventures and having a sort of consolation prize. Is that a pessimistic view? Maybe. I like to keep it real as well. You can plan and have all of your ducks in line for the highest chance of success. There have been lots of people that poured their everything into their endeavors. Some made it huge, many lost everything and have been forgotten.

A 20% match is huge though especially since any employer contributions have separate limits from your personal limits. It's $18000 for personal contribution and a maximum of $54000 for combined employer+employee. Most companies offer something like @jon.a said where they'll match half of to a maximum of 6% (my company does this). It's essentially free cash (you could argue that the money you have to put up to get that match could be used elsewhere etc etc) but you see the idea. Most people recommend taking the free cash and calling it there.

So it's up to you to determine your comfort level in adding more risk by limiting your 401k.

 

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[CareCPA]

Just so everyone is clear, this is your specialty right? While the rest of us are armchair QB'ing, you're on the field?

Yes sir. Licensed CPA specializing in small business and individual taxes.

 

[Yoda]

How so? I admit, I'm not well versed in 401(k)s because I never had one, nor had a use for one.

It's now qualified money, so it's inaccessible. The only exceptions are reaching age 59.5, or using substantially equal periodic payments under IRS code 72(t).

If you do decide to take it without using either method, you get penalized 10%.

And, in both cases, with or without penalty, you're taxed by the percentage of whatever your income is in the year you accessed it, without limit or exception.

You give me a dollar, I give you back $1.20. That's an immediate 20%.​

You give me a dollar, I give you back $1.20, but with these rules attached? Your true value is $1.08 before you play ball with Uncle Sam.​

 

[CareCPA]

Also consider the risks of your new business. 401k funds are generally protected from lawsuits.

 

[jon.a]

Yes, 20% company match.

That's not clear.
I haven't had a 401k for years. But, back in the olden days the company match was generally on a scale. X% match up to X% of your salary. For example one of mine maxed at 100% at 6%. If I'm remembering right.

 

[Yoda]

Yes, 20% company match.

Like @jon.a said, you always take the match.

Here's the caveat... it has to be a dollar-for-dollar match. You put in$1, they put in $1.​

When you say 20% match, something tells me this is a you put in $1, they put in $.20 type of deal.

You wouldn't want to participate in that.

 

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[jon.a]

It's either a very good deal or a very bad deal.
details
details
details

 

[lowtek]

Not an investment professional, and none of what I say constitutes investment advice

Even if the company matched, I wouldn't put a single penny into it. I see no upside to giving up control of your money for thirty years in the hopes that the investment will actually materialize into something that justifies the opportunity cost.

On the flip side, there is enormous potential downside:

One look at the balance sheet of the USA tells you that this charade isn't going to go on forever. There is a strong possibility that the .gov will tax 401k holdings of the citizens, because "shared sacrifice". Even if that doesn't happen, it's likely that whatever steps the feds take to deal with their fiscal mess will result in a stock downturn, which means you take a haircut and have to hope the market recovers in the coming years.

Even if you think the above is tinfoil hattery of the highest order and that I'm smoking some Alex Jones grade shit, ask yourself, would you ever give money to a friend under the following conditions:

The friend will take the money to the casino for you and possibly give you a 5-10% return over the next 30 years - but this isn't guaranteed and he could lose it all and you have no recourse to get a single penny back, because hey... you knew the risks.

Your friend will also charge you a fee for the privilege of letting him gamble with your money. He charges it whether he makes money for you or not, because he's providing such a valuable service.

Don't like the terms and decide you want your money back? That'll cost you 10% right off the top, plus whatever extra you're going to owe the tax man.

.... I'm guessing that these conditions, offered by a friend, would scream SCAM. Why should it be any different because it's strangers on wall street offering those terms?

The "tax benefits" do nothing to change my argument. You give up control of 18,000 dollars to let your friend gamble with it, and get to lower your taxes by a few thousand a year - which is still a net loss. It doesn't change the fact that you lose control and have a huge downside, with not enough upside to justify the opportunity cost of giving up control of your money for decades.

TL;DR 401k? Not even once.

 

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[Under-Dog]

If you're not hurting financially and you're able to have funds for your business while continuing to contribute I'd keep on doing it. Especially since your company matches.

 

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[CMA]

Yes, 20% company match.

20% company match?! Woah! I have never heard of anything close to that. I say max it to the company match if you have the cash to start your business without the 401k money.

 

[mike24601]

If putting away 5-10% of your income is not a hassle, then it's just another calculated risk to add to your wealth equation. It is not something you want to rely on, but it's not inherently stupid when you include it as part of a healthy balanced diet. I work with a few people who did it slowlane, have 2-3 million dollars in their 401k/IRA's and are quite healthy and vigorous and ready to enjoy retirement. What is not so smart is just coasting through life expecting that everything will be intact when you arrive at the end of the road. If you leave your job and stop contributing for the rest of your life, that money will still continue to grow and contract while you work on other things. For me, personally, I saw more benefit to having my 401k money liquid and ready to use than to leave it sitting, because I am young and have more time to fail and begin again. I withdrew my account at penalty, and having that cash has given me a lot more flexibility.

 

[Kinematic]

$1.00 + 20% = $1.20 (20% more to invest)

$1.20 * (percent change in 401k over time) = Gross Return

(Gross return) - (Uncle Sam's share) = Net Return

 

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[Millenial_Kid5K1]

I guess I'm more pessimistic than most people on here because I got burnt last year. Put $5500 into a Roth IRA, then took it out a few months later to fund my business aspirations. Immediately lost $570(but also gained 200). Same thing would have happened with a 401K. If I'd done the same thing with a regular fund, I'd have only lost $70(profiting $130).

I'll stick with regular investing when I've got money not allocated for a business venture so that I can use it as I see fit, thank you very much.

 

[LauraMorenoCa]

Hi there,

At the moment I work at a company full time and 10% of my salary goes into a 401k. My plan is to start my own company soon but in the meantime, should I stop my 401k?

I am a little bit confused!

Thanks so much!

 

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[LauraMorenoCa]

$5000 in a 401k:
Worth up to $200,000 40 years from now, but you can't touch it before then, and that's really only $75,000 in 2017 dollars.

$5000 in a business:
Could easily be worth millions in a few years.

Ultimately it's up to you, but that's how I see it.

I like your point. I do have cash ready to invest in my business. I am reading "Unscripted " and it kind of goes against 401k so I was just wondering.

Thanks so much again!

Laura

 

[LauraMorenoCa]

What's the company match? I still get stuck on going for the company match. I'm sure that someone smarter will chime in.

Yes, 20% company match.

 

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[Ivan2BAlive]

Hi there,

At the moment I work at a company full time and 10% of my salary goes into a 401k. My plan is to start my own company soon but in the meantime, should I stop my 401k?

I am a little bit confused!

Thanks so much!

Greetings Laura,

I would least roll it into a Roth IRA. When you do that, you won't get charged any pre-tax dollars, but will grow over time. But since we're in the Millionaire Fastlane Forum, don't rely on that as a source of retirement. If you want to cash that out, your're probably going to get taxed very heavily when you withdraw, say probably up to 40%.

I think that's my two cents, but I would urge you to cross reference my information with a local "trusted" tax or financial advisor.

 

[Mr_Maravish]

Yes, 20% company match.

I think I need to switch roles. 20%?!?! Mine only matches 5%

 

[Yoda]

Still, that's an immediate 20% return.

No, it's not.

 

[Ivan2BAlive]

You're absolutely right CareCPA, my mistake. That's why I'm not a financial advisor . Listen to him Laura.