401 Que?

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401 Que?

Very punny title, Ryan … I’ll leave the comedy to you, from now on πŸ™‚

Ryan raises the critical conundrum coherently (see, I’m already switching from puns to alliteration?!): when does it make sense to invest inside the tax-advantaged vehicle v outside? One gives you tax and employer-matching advantages and the other gives you earlier/easier access to your funds and (perhaps) better ‘investment’ choices … what would YOU do?


Our official retirement funds are divided between three accounts:

– My wife’s California Teacher’s Pension Fund, which claims it is unaffected by the current fiscal crisis of California, is the result of steady stream of saving from 8 years of work (she’s now “retired”) and some employer matching, though I’m not sure how much.
Current Value: $34,000

– My 401K which is a rollover from about 4 different jobs, most non profit, some that matched my contributions, all that paid very little compensation.
Current Value: $6,000

– My SEPP that I formed when I started my company (It’s my company, so I guess it’s all matching funds!).
Current Value: $15,000

We lost about 45% of these funds over the past year. (hence the cartoon!)

As for what I’m going to do to get that money back? To be frank, I’m not sure!

For starters, I’m going to focus on other types of investment (RE, small business, intellectual property, etc.) and less on 401ks and SEPPs. I’m only going to contribute as much to my SEPP as I believe makes good sense from a taxation standpoint. For example, if I owe $3,000 in taxes but I contribute $10,000 to my SEPP, then I owe $0 in taxes.

Now, I could pay the $3,000 in taxes and invest the remaining $7,000 in something that will not only return enough to make up for the $3,000 paid in taxes, but also outpace the return of the SEPP fund thereafter (the latter being the decidedly less difficult task), but if I knew what investment does both, I could reach my number in a significantly shorter time frame!

Though maybe I’m way off base with this. Adrian has made intriguing arguments for not contributing to a 401k that the company matches (a practice that most pundits deem as a “no brainer”), so maybe my logic is flawed with my tax theory too! What do you think?

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Ryan, this is a point that I’ve been pondering as well lately. I’ve almost exclusively been a tax-advantaged investor.

I think for me it will come down to my time horizon for the money being invested. If I think I will need it early (before a 59 1/2 retirement) then maybe it will need to be invested outside a 401K, IRA etc.

For most of us, the dates we selected for our Numbers (and subsequent withdrawals) are before 59 1/2. Mine puts me just short of my 50th birthday. That alone should be enough to convince me of changing my strategy, but old habits are hard to break.

I can definitely understand the reasons to use these retirement accounts, to shelter as much tax as you can.

I just always find in every situation in life that I get what ever I focus on. It’s like the old saying goes “Where attention goes, energy flows and results show”. In other words, as long as you are focusing 100% of your energy, thoughts and vision on starting a great company, buying appreciating assets and other Money Making 201 strategies to get to your number faster, I see nothing wrong with taking some advantage of some of these tax-advantaged accounts, but I think that a true entrepreneur should set this up so that they don’t even think about it, or even know what is in those accounts.

In other words, let someone else deal with it so you never even focus your thoughts or attention on it, so that way, the thought never crosses your mind that you have a ‘fall-back’ or ‘fail-safe’ if your entrepreneurial efforts don’t work.

Keep the possibility of HUGE failure and the fear of not reaching your number by your date in the forefront of your mind and pretend that there is no retirement fall-back to lean on in 30-100 or whatever years from now, and I believe you will get to where you want to be πŸ˜‰

YO Adrian – I think you are in danger of being replaced as our mentor… SCOTT I like your comments about not focusing on ‘fall-back’ or ‘fail-safe’
I have always discovered that success is often closely related to how we think and talk. If we talk the possibility of failure we begin to make failure a greater possibility in our thinking. Scripture states in Proverbs 23:7 “As a man thinketh in his heart so is he..”

@ Ryan – The question that you are faced with is “where do I invest [choose amounts of choice: $34k + $6k + $15k, adjusted for taxes and penalties]?”.

This is a decision that you make by default every day, but should explicitly make at least once per year.

All you need to think about is How Much you need and By When you will need it and then you should be able to list the activities and/or investments that can get you there.

I use the terms “How Much” and “By When”, here, as they MAY correspond with your Number and Date, but they may not …

…. for example, your choice may be to hold a fund in reserve ‘just in case’ (your wife’s $34k might be ideal) … but, you still need to do the analysis; even for her the 401k may / may not be the best choice … only a dialog with your wife, and the ensuing analysis, will tell you.

BTW: There may be a number of choices, so it’s important to look at the ‘after tax’ situation … this, of course, is where the 401k, etc. should have an advantage, but the disadvantages will be in access (before 59 1/2; investment types/choices; fees; etc.).

@ Lee – I definitely know this to be true in my own life. Sometimes I need that danger to keep me fighting for what I want, but indeed we also get exactly what we continue to think about πŸ˜‰

@ Scott – Very Napolean Hill/James Allen (http://www.asamanthinketh.net/) thinking of you. I have read Think and Grow Rich and ALL of James Allen’s stuff (which I prefer). It is really intriguing stuff and I have personally seen it be EXTREMELY effective in my life as well.
overall, great points made by you, Scott. I think moving forward, I will take the minimum amount that makes good tax sense and invest it in a Ron Popeil account (“set it…and forget it!) The rest of my cash and energy will be focused on my purpose/goal.

@ AJC – great summary of the question at hand (you have a knack for reigning us in). If I look at when I want to retire, a 401K will do me no good, period. And if I were a single guy with no responsibilities I would have no problem going for my goal guns a blazing, no holds barred. However, I have a wife and two kids to support and so, a safety net is required equipment on my journey. I will, however, keep it to a responsible minimum and as I stated earlier, will not be focused on it.

Good for you Ryan! See ya at the top buddy πŸ˜‰

@ Ryan, just adding my two cents to your first thought – if it contradicts the rest, ignore it, but I’ve always thought it was better to pay myself than Uncle Sam. Just trying to figure out other ways to do that than socking away more in an IRA (like before it becomes a tax-reduction question) and I think that’s what Scott and Adrian were talking about…

[…] Ryan – Is a highly paid rep. for medical equipment with some ideas of his own. He is exploring the options as to whether he should be investing INSIDE his 401k etc. or OUTSIDE, both for him and/or his wife. What advice could you give him? […]