I absolutely love getting great money questions. It might be my favorite thing about blogging about money, investments, trends, and strategies. Recently, I wrote a blog: More people tapping 401(k)s . In that blog, I wrote about unfortunate reasons why people are taking premature distributions from their 401K plans. A reader responded to that blog with a very well thought out and pro-active question:
Dear Mr. Rosendahl,
Regarding 401k's, I would be curious to hear your perspective on the recent controversy over a possible government confiscation of 401k assets as was the case in Argentina. I recently turned 59 1/2 and am seriously considering removing those funds and paying the taxes.
I am employed and fairly well situated financially. I only have 93k in mortgage debt.
But half of my savings (300k) is in my 401k.
Your thoughts? Should I be concerned?
Thank you. Your blog has been very helpful to m.
This is great question for a couple reasons. Before we get into the confiscation question, I'd like to get into more practical advice I've been using for the past 3 years for my mom and dad.
When I'm creating money strategies and investing I often think the issue backwards. It stems from having a three dimensional brain, which allows me to see the equation from all angles at the same time. This is very different than a linear brain. So for me, it's easy to think it back backwards.
If I'm thinking and working backwards you have to take money out of your 401K by the age of 70 1/2, right? Yes. Unless you have enough money to retire without touching your 401K, you will need money inside that plan to live off, right? Yes. Mechanically and fundamentally, most people will need to take money out of their 401K and IRAs prior to 70 1/2 to support their retirement or at least taking minimum required distributions upon that age.
Given that relative certainty it really becomes a tax question that drives the investment strategy. What do you think combined tax rates are going to be in the future given the federal and state deficits? Higher, much higher tax rates seems to be the logical assumption.
Therefore, the fundamental advice with regards to your 401K and IRA distribution plan is the same as what I've been giving my parents. We implemented the plan 3 years ago: We've been dollar cost averaging money out of their retirement accounts. When we started this plan we calculated an equal distribution dollar amount over time. We don't not want to take it all out at once pushing them into the maximum tax rates and impacting the distribution strategy.
The idea is we know we are going to take money out of their plans, and now that they are retired, they are at the lowest combined tax rates they will ever be at, so now is the right time. But under the view of much higher tax rates in the future I doubt their current tax rate matters that much.
The practical answer is to start a distribution plan. Discuss it with your CPA or tax advisor to understand your tax income brackets to have an idea how to take out money to avoid jumping into the highest brackets.
The idea I really like is a $20-30K annual distribution plan and use the funds to retire your mortgage loan if you plan on retiring in that house. By paying off that mortgage you will provide yourself a guaranteed return on your money that beats government and corporate bonds with more certainty than the stock market. While doing that, if you continue to work and save some money you can replace a part of those funds. No debt and all your money out of your plans is an idea I personally love.
The government is eventually going to confiscate some kind of asset from Americans. Why? It's a convoluted answer but here goes: As we head into the deflationary cycle the pressure to raise taxes with be intense, but higher taxes aren't going to solve the issue, it will actually create additional problems, but it's an inevitable outcome. As we head into deflation, Social Unrest is going to become quite intense. We will see Social Unrest between races, sexes, old vs. young, people vs. the government, people versus corporate America, and most off all the poor (The Masses) vs. wealth or perceived wealth.
The social outcry for the government to soak (The Claw Back) the rich will be so over whelming that all the money in the world will not be able to buy off politicians who want to be career politicians and they will cave to the masses in the middle of Social Unrest. The government will come after some form of assets tied to the wealthy.
They will not, let me repeat; will not come after gold and silver. There's just not enough wealth stored in those assets to cure America's balance sheet. Not even close. It's not like the 1930s and 1940s where precious metals were a large portion of wealth.
I doubt it will be muni-bonds, an asset held by the wealthy, because I envision many muni-bonds becoming worthless on the back of broken down states. The government is going to let those bonds go worthless as a way to protect states someday while soaking the wealthy. It's an odd idea I haven't seen anyone discuss but it's a concept I could see happening.
So, where does Uncle Sam get the funds they need? I see two possible ideas. First is the confiscation of or some kind of partial default on US Treasury obligations. It's a wild idea but the largest asset category is the bond market. It would be quite easy for the government to discount every treasury obligation in the market place by 20-35%. It would be the most equitable, efficient and easy way of trying to solve the balance sheet problem, in part.
The other idea is to confiscation 401K and IRAs. If you haven't noticed how our country really works, it's crony capitalism in the good times and crony socialism in the bad times. During severe economic weakness and Social Unrest we will see the outcry from the public, most of whom will have already spent their 401Ks to live off of while the Social Security system is going broke.
Over the past 50 years, the US government has trained society to believe it's the government's roll to be the provider of last resort from everything to economic stimulus to healthcare to retirement. The masses may cry to further socialize retirement for all by confiscating the remaining 401K and IRA plans, which will only be held by those of wealth in a few years.
Therefore, by making the fundamental tax decision to take money out now to avoid higher tax rates we know are coming, you also protect yourself in case the government insanity gets so bad they come after your retirement plans. And remember this idea, much higher taxes in the future is a confiscation of your 401K and IRA without actually taking it.
I want to thank the reader for asking a great question, I hope you find my strategy and reasoning helpful.
Hope all is well.