Washington Post Article About People Raiding 401k Accounts

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Bob's not my name
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Wed Jan 16, 2013 5:29 pm

DickBenson wrote: From a societal viewpoint, you should not be able to raid any retirement account that has been given government benefits such as tax deferral.
Again, studies have shown that moderating the irreversibility of contributions increases participation. The government provides tax benefits for a vast array of nonsense; it's hardly a distinguishing characteristic of retirement plans.

Engineer
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Engineer » Wed Jan 16, 2013 5:46 pm

A recent article in the NY Times talks about financial behavior in tough times http://www.nytimes.com/2013/01/15/scien ... elief.html?

Carl

bdpb
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Re: Washington Post Article About People Raiding 401k Accoun

Post by bdpb » Wed Jan 16, 2013 5:51 pm

Harold wrote:
bdpb wrote:There may be logical reasons for a company not offering loans from their 401k but I don't see how those other reasons apply in this thread. The whole context of the thread is "people are dumb for withdrawing from their 401k" and the post was "we didn't want people to borrow their savings" presumably "because we think that's a dumb thing to do."
You were criticizing caroljim for operating her company's 401(k) without offering a loan option. I simply pointed out that your criticism was unwarranted.
If carolim's reason for not offering a loan option was for some unknown reason then I might agree with you. But it certainly seems implied that no loan option was offered because the 401k committee is smarter than everyone else because they knew people would stupidly borrow their savings. If that's the case then I think the criticism is warranted.

Maybe caroljim would like to explain her reasoning. If I'm all wet, I'll gladly apologize.

NYBoglehead
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Re: Washington Post Article About People Raiding 401k Accoun

Post by NYBoglehead » Wed Jan 16, 2013 6:01 pm

DickBenson wrote:You cannot raid your Social Security account, and you could not raid the old TIAA retirement accounts. From a societal viewpoint, you should not be able to raid any retirement account that has been given government benefits such as tax deferral.

The purpose of these retirement accounts is not to build wealth, nor to act as an emergency fund, but to build resources that will keep you off the government and/or society's back upon retirement.

Dick

You DO NOT have a Social Security account. Yes, you pay the taxes now. Yes, you have an expectation that you will receive benefits later. But no one owns a Social Security account.

As far as being able to borrow from a 401k, while I agree it should avoided at all costs, it most definitely should be allowed. It is tax-deferred income, not tax-free. The government is going to get their pound of flesh one way or the other. To suggest that it is somehow immoral for one to "raid" the income that they set aside is absurd.

DickBenson
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Re: Washington Post Article About People Raiding 401k Accoun

Post by DickBenson » Wed Jan 16, 2013 6:48 pm

NYBoglehead wrote:You DO NOT have a Social Security account. Yes, you pay the taxes now. Yes, you have an expectation that you will receive benefits later. But no one owns a Social Security account.
I had an Social Security account which listed the amount of dollars that it contained (my benefits were based upon this amount). But you're correct that I didn't "own" it in the sense that I could sell it, or cash it in. And that's the way it should be.

I didn't mean to "suggest that it is somehow immoral for one to "raid" the income that they set aside", but simply that I felt that it was bad policy.

Dick

Jack
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Jack » Wed Jan 16, 2013 7:52 pm

NYBoglehead wrote:You DO NOT have a Social Security account. Yes, you pay the taxes now. Yes, you have an expectation that you will receive benefits later. But no one owns a Social Security account.
You don't really "own" your 401(k) account either. The government owns just as much of it as congress decides to. Not much different from Social Security. Both are subject to political decisions as to how much you get to spend. I fail to see why anyone would consider one more certain than the other.

Bob's not my name
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Wed Jan 16, 2013 8:00 pm

That argument applies to everything you have.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by texasdiver » Wed Jan 16, 2013 9:30 pm

Default User BR wrote:
assumer wrote:Is there a disadvantage to rolling over? It seems like an easy way to consolidate things and make it simpler, if there are no fees or taxes for rolling over 401k's.
There are a few:

1. Possible better protection from judgments that with IRAs, varies by state.

2. Qualified plans sometimes have offerings that aren't available at the retail level, like institutional funds or stable-value.

3. Able to withdraw without penalty if separated from service at age 55+.
A fourth reason to avoid rollover is to preserve the ability to do backdoor Roth contributions without tax implications. In fact I rolled all of my existing IRAs into my legacy TSP account (Fed government equivalent of a 401(k)) in order to facilitate backdoor Roth contributions. Luckily I had the stellar TSP available and not some junky 401(k) plan in which to roll my IRAs into.

Bob's not my name
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Thu Jan 17, 2013 5:18 am

Looks like the Chicago Tribune broke the story first ... five years ago

http://www.bogleheads.org/forum/viewtopic.php?p=91157

rkhusky
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Re: Washington Post Article About People Raiding 401k Accoun

Post by rkhusky » Thu Jan 17, 2013 7:49 am

The article had this note:
Generally, workers are allowed to tap their retirement accounts for loans up to $50,000, or half their account’s value, whichever is smaller.
How much would $50K affect retirement anyway? My guess is that most people taking money out of their 401K prematurely won't be depending on it anyway. They will depend on SS and/or on working until they die.

Bob's not my name
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Thu Jan 17, 2013 8:12 am

rkhusky wrote:My guess is that most people taking money out of their 401K prematurely won't be depending on it anyway. They will depend on SS and/or on working until they die.
On what basis are you guessing that? I took a $50,000 loan from my $1M 401k, and I will be depending on my 401k in retirement. (Actually, it's 401k/IRA/403b.) I didn't consider the loan to be a premature withdrawal, I considered it to be sound financial management, since the 3.25% rate was better than I could get commercially for the loan purpose. I have polled only myself, but 100% of poll respondents are depending on their 401k.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by assumer » Thu Jan 17, 2013 8:18 am

texasdiver wrote:A fourth reason to avoid rollover is to preserve the ability to do backdoor Roth contributions without tax implications.
How would rolling over a 401k to a traditional IRA affect this?

NYBoglehead
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Re: Washington Post Article About People Raiding 401k Accoun

Post by NYBoglehead » Thu Jan 17, 2013 8:25 am

Jack wrote:
NYBoglehead wrote:You DO NOT have a Social Security account. Yes, you pay the taxes now. Yes, you have an expectation that you will receive benefits later. But no one owns a Social Security account.
You don't really "own" your 401(k) account either. The government owns just as much of it as congress decides to. Not much different from Social Security. Both are subject to political decisions as to how much you get to spend. I fail to see why anyone would consider one more certain than the other.
Of course you own your 401(k) account. You decide how much to take out, one needs to look at the numbers to see how much of it will be taxable if that is what you are saying. In 2013 you'd have to take out 20k for MFJ just to cover the standard deduction and individual exemptions. That is leaving out all other deductions. So as far as Congress "taking what they want" your point misses the mark. Yes, the withdrawals will be taxable. But you as an individual have some ability to determine how much of it is taxed. And if I drop dead tomorrow the assets in my 401k go to whomever I decide they go to. Social Security, not so much.

rkhusky
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Re: Washington Post Article About People Raiding 401k Accoun

Post by rkhusky » Thu Jan 17, 2013 8:56 am

Bob's not my name wrote:
rkhusky wrote:My guess is that most people taking money out of their 401K prematurely won't be depending on it anyway. They will depend on SS and/or on working until they die.
On what basis are you guessing that? I took a $50,000 loan from my $1M 401k, and I will be depending on my 401k in retirement. (Actually, it's 401k/IRA/403b.) I didn't consider the loan to be a premature withdrawal, I considered it to be sound financial management, since the 3.25% rate was better than I could get commercially for the loan purpose. I have polled only myself, but 100% of poll respondents are depending on their 401k.
What percentage of people prematurely taking money out of their 401K's (or variations thereof) have a $1M balance?

Faith20879
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Faith20879 » Thu Jan 17, 2013 9:51 am

I agree with celia:
I take these articles with a grain of salt.
My MSA is the District of Columbia, about 70% of my peers work for the Federal Gov., State, or some mega contracting firms. Some have lucrative pensions but most are decent if not lucrative. I would say this group doesn't need to save like a fiend and their basic needs are already covered.

I know this may not be true for the Gen X or Y, but for the baby-boomers who are already or approaching retirement, having a pension is still pretty common.

Regards,
Faith

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Dianne » Thu Jan 17, 2013 10:28 am

NYBoglehead wrote:
Jack wrote:
NYBoglehead wrote:You DO NOT have a Social Security account. Yes, you pay the taxes now. Yes, you have an expectation that you will receive benefits later. But no one owns a Social Security account.
You don't really "own" your 401(k) account either. The government owns just as much of it as congress decides to. Not much different from Social Security. Both are subject to political decisions as to how much you get to spend. I fail to see why anyone would consider one more certain than the other.
Of course you own your 401(k) account. You decide how much to take out, one needs to look at the numbers to see how much of it will be taxable if that is what you are saying. In 2013 you'd have to take out 20k for MFJ just to cover the standard deduction and individual exemptions. That is leaving out all other deductions. So as far as Congress "taking what they want" your point misses the mark. Yes, the withdrawals will be taxable. But you as an individual have some ability to determine how much of it is taxed. And if I drop dead tomorrow the assets in my 401k go to whomever I decide they go to. Social Security, not so much.
NYBoglehead is right. Legally, 401(k)s are different from Social Security. Your interest in your 401(k) is a property interest protected by the takings clause of the 5th Amendment. But the Supreme Court has held that Social Security benefits are *not* property subject to the takings clause. (Flemming v. Nestor, 363 U.S. 603 (1960), http://caselaw.lp.findlaw.com/scripts/g ... 3&page=603.)

Social Security benefits are unique -- you have legal rights in them, but those rights are not property rights. For example, you have the right not to be treated arbitrarily with respect to your benefits; the government has to follow duly-enacted rules that apply to everybody when it decides how much to pay you. But you don't get the same level of due process if the government reduces your benefit amount that you would get if the feds tried to claim that you owe them part of your 401(k) for some reason. On the group level, it would be comparatively easy for the government to just cut everyone's Social Security benefit by 10%, but if they want to take an extra 10% of everyone's 401(k) they have to construct it as part of the income tax, which is much more complicated for them and involves more constraints.
Last edited by Dianne on Thu Jan 17, 2013 11:18 am, edited 1 time in total.

dbr
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Re: Washington Post Article About People Raiding 401k Accoun

Post by dbr » Thu Jan 17, 2013 10:34 am

Dianne wrote: . . . But you don't get the same level of due process if the government reduces your benefit amount that you would get if the feds tried to claim that you owe them part of your 401(k) for some reason. On the group level, it would be comparatively easy for the government to just cut everyone's Social Security benefit by 10%, but if they want to take an extra 10% of everyone's 401(k) they have to construct it as part of the income, which is much more complicated for them and involves more constraints.
But, but, but . . . on this forum people keep saying that the Federal Government owns part of each person's 401K or IRA :oops:

Of course, your statement is absolutely correct. Workers do not own their SS and the Government does not own any part of any tax deferred retirement accounts. As you say what the Government "owns" is the tax and benefit scheme for SS and the tax scheme for income, including deferred taxation of income.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by ascenzm » Thu Jan 17, 2013 10:54 am

555 wrote:Perhaps when these people have finished raiding their 401k accounts , they'll start calling for ways to raid our 401k accounts too.

+1000

Yep. I feel like I have a target on my back.

I stopped IRA contributions two years ago (don't qualify for the Roth) and lowered my Roth 401K contributions to the minimum level needed to capture the maximum employer match.

Personally I feel it is not a good idea to have the bulk of one's assets tied up in retirement accounts.

Mike
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Bob's not my name
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Thu Jan 17, 2013 11:20 am

rkhusky wrote:What percentage of people prematurely taking money out of their 401K's (or variations thereof) have a $1M balance?
100% of those polled in our study.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Jack » Thu Jan 17, 2013 12:07 pm

People usually bring out the "ownership" issue when they argue that they don't count Social Security as part of their retirement calculations. The tinfoil hat types always drag out Flemming v. Nestor while failing to note that it was a ruling issued in the midst of the McCarthy hysteria in which a man was deported for briefly belonging to the Communist Party during the 1930s and lost his Social Security benefits.

But 401(k) "ownership" provides no more certainty about benefits. A 401(k) includes a future obligation, a legal claim on your account, to give an unknown amount of your account to the government which the Congress can change at any time. The Congress can change the tax on your 401(k) by 10% just as easily as change your Social Security benefits by 10%. The idea that one is more certain than the other and can be counted on for retirement while the other not is just silly mental accounting. Both are subject to political decisions.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by rkhusky » Thu Jan 17, 2013 1:35 pm

Bob's not my name wrote:
rkhusky wrote:What percentage of people prematurely taking money out of their 401K's (or variations thereof) have a $1M balance?
100% of those polled in our study.
:happy

dbr
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Re: Washington Post Article About People Raiding 401k Accoun

Post by dbr » Thu Jan 17, 2013 1:52 pm

Jack wrote: But 401(k) "ownership" provides no more certainty about benefits. A 401(k) includes a future obligation, a legal claim on your account, to give an unknown amount of your account to the government which the Congress can change at any time. The Congress can change the tax on your 401(k) by 10% just as easily as change your Social Security benefits by 10%. The idea that one is more certain than the other and can be counted on for retirement while the other not is just silly mental accounting. Both are subject to political decisions.
The issue isn't about ownership. It is exactly what you say it is, an issue about taxation. Specifically it is an issue about income taxation originating with the fact that taxes on income that might have been due originally have been deferred. Labeling that a claim of ownership is a form of hyperbole that might be useful in reminding people what the tax code says and could say in the future, but it surely must make more sense to understand taxation than to invoke a figurative use of the concept of ownership. The idea that because some entity has the power to take wealth from someone should be expressed as outright ownership of that wealth seems a bizarre and unhelpful form of conversation. That is especially true when the claim is conditional not on what the asset is but rather on an entirely different transaction, namely what someone's income is. There ARE taxes that are taxes on what one owns, property tax, to be exact. Still, one hardly hears the statement that the County owns part of a home. Indeed, since property taxes are perpetual, one could even conclude that the present value of future property taxes exceeds the present value of any property and that therefore no property is privately owned. That would also be bizarre.

I would agree that there is no more certainty in 401K plans than in SS, but the issue has nothing to do with ownership.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by FoolStreet » Thu Jan 17, 2013 1:54 pm

rkhusky wrote:
Bob's not my name wrote:
rkhusky wrote:My guess is that most people taking money out of their 401K prematurely won't be depending on it anyway. They will depend on SS and/or on working until they die.
On what basis are you guessing that? I took a $50,000 loan from my $1M 401k, and I will be depending on my 401k in retirement. (Actually, it's 401k/IRA/403b.) I didn't consider the loan to be a premature withdrawal, I considered it to be sound financial management, since the 3.25% rate was better than I could get commercially for the loan purpose. I have polled only myself, but 100% of poll respondents are depending on their 401k.
What percentage of people prematurely taking money out of their 401K's (or variations thereof) have a $1M balance?

We took an 80k loan from our ~700k 401k balances in order to qualify for a refi. The lenders wanted to see the cash in the bank as reserves. We got there loan then promptly repaid the 401k loan. I don't feel morally superior or inferior, but I recognize how close we were to the edge of a downward spiral during the downturn. We're heavily leveraged but now that the economy is stabilizing, the leverage play seems to look a little better. Now that our refi has gone through we're progressing more quickly with our deleveraging plans. It appears to be working for me but I realize how difficult these things can be.

texasdiver
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Re: Washington Post Article About People Raiding 401k Accoun

Post by texasdiver » Thu Jan 17, 2013 2:34 pm

assumer wrote:
texasdiver wrote:A fourth reason to avoid rollover is to preserve the ability to do backdoor Roth contributions without tax implications.
How would rolling over a 401k to a traditional IRA affect this?
When you do a backdoor Roth you are making a Roth contribution even though you don't qualify to do it directly. So what you do is the following:

1. First make a non-deductible traditional IRA contribution. There are no income limits to IRAs if you are not deducting them.
2. Convert the traditional IRA to a Roth IRA. There are also no income limits to doing this.

However if you have existing IRAs the govt will charge you tax on any earnings within the IRA account and they don't do it account by account but across all accounts. So if you have any IRAs that came from another source (deductible IRAs or rollover IRAs that have subsequently grown) you'll owe taxes on the amount your IRAs have grown in the aggregate when you do the rollover. It is more complicated than this but that is the gist of it.

Point is, if you are going to be making regular backdoor Roth contributions, you want to "hide" all your existing traditional IRA accounts by rolling them into 401(k) accounts or rolling them over to Roths first. If you are rolling your old 401(k) accounts into IRAs you are going in the wrong direction and it will complicate your ability to do a backdoor Roth in the future.

This is only ever going to be an issue if you are at or above the income limits for making direct Roth contributions.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Jack » Thu Jan 17, 2013 2:36 pm

dbr wrote:I would agree that there is no more certainty in 401K plans than in SS, but the issue has nothing to do with ownership.
Yes, that was exactly my point, that opponents of Social Security always drag out the phony issue of ownership making one more certain than the other. The point is that ownership really doesn't make a difference. The government decides how much you get to spend of each.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by texasdiver » Thu Jan 17, 2013 2:46 pm

Bob's not my name wrote:
rkhusky wrote:My guess is that most people taking money out of their 401K prematurely won't be depending on it anyway. They will depend on SS and/or on working until they die.
On what basis are you guessing that? I took a $50,000 loan from my $1M 401k, and I will be depending on my 401k in retirement. (Actually, it's 401k/IRA/403b.) I didn't consider the loan to be a premature withdrawal, I considered it to be sound financial management, since the 3.25% rate was better than I could get commercially for the loan purpose. I have polled only myself, but 100% of poll respondents are depending on their 401k.
I think loans are somewhat different from just pulling cash out and paying the penalty.

I pulled a loan out of my TSP back 15 years ago to use use as part of the down payment on my first house. I forgot the amount....probably around $15 grand. It was structured like an ordinary loan and I had to pay it back via payroll deductions over the next several years. I was charged about 6% interest but I was paying myself the interest. So my account balance grew by more than the amount I took out as a loan because all the interest paid went straight into my TSP along with the principal. The disadvantage of taking out a loan is that you don't get any earnings on the loan balance but the advantage is that you are paying yourself the interest and not some bank.

Point is, 401(k) loans can be a good deal for people who are otherwise responsible and using it for some responsible investment like a downpayment on a house. The problem is if they default on the loan or quit the job.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Thu Jan 17, 2013 5:09 pm

texasdiver wrote:The problem is if they default on the loan or quit the job.
Defaulting on a loan is a problem. Quitting a job isn't necessarily. Both my old 401k and my current 403b don't require employment. For those in plans that do, having to repay the loan may merely throw you into the other loan option. For example, if you decided to take a 401k loan instead of a student loan and then you changed jobs, you could take a student loan to repay the 401k loan. If you were laid off, you might be looking at a low income and low tax year, in which case you might repay the loan with a TIRA withdrawal (penalty-free when used to pay for college). The employment requirement is a very important consideration, but it must be assessed reasonably.

indian86
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Re: Washington Post Article About People Raiding 401k Accoun

Post by indian86 » Thu Jan 17, 2013 5:26 pm

this is why I keep 100k in cash at ING at all times. Never know when unexpected things happen. Plus, makes me more charitable as well.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by leonard » Thu Jan 17, 2013 6:21 pm

bdpb wrote:
caroljm36 wrote:I'm on the 401k committee where I work and we decided from the get-go that we didn't want people to be able to borrow their savings. That's one reason we have only about 80 participants out of a possible 200.
Why would you make that decision for other people? They may or may not make the right decision, but please let them decide for themselves.

Let people borrow money from their 401k. They may not be able to get financing any other way. You may not think it's right, but it may still be an optimal solution for them.

You may be adding to the problem of people not saving money in their 401k in the first place. As your numbers point out, many people will not save in their 401k if they can't get to the money until they are retired. Those same people are likely not to save at all if it isn't take right out of their paycheck.
Why? Because as a 401k plan administrator you have a personal, fiduciary duty to represent the best financial interests of the employees of the plan. Some might argue - and I would be one of them - that it goes against being a good fiduciary. I think it's a strong argument that offering a loan plan with loan origianation and maintenance fees, is as neglectful as offering funds with 2% ER's. Plus, it adds to the plans complexity of administration to offer and track all this stuff.

A 401k is a retirement account - not a loan account. Keep everyone contributing and focusing on retirement AND not scheming on how they can get at that money earlier. And, keep administrative costs low by eliminating the complexity of a 401k loan program. Besides - when they roll out of the plan - something like one third of participants cash out then. They can wait.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by NYBoglehead » Thu Jan 17, 2013 6:34 pm

Jack wrote:People usually bring out the "ownership" issue when they argue that they don't count Social Security as part of their retirement calculations. The tinfoil hat types always drag out Flemming v. Nestor while failing to note that it was a ruling issued in the midst of the McCarthy hysteria in which a man was deported for briefly belonging to the Communist Party during the 1930s and lost his Social Security benefits.

But 401(k) "ownership" provides no more certainty about benefits. A 401(k) includes a future obligation, a legal claim on your account, to give an unknown amount of your account to the government which the Congress can change at any time. The Congress can change the tax on your 401(k) by 10% just as easily as change your Social Security benefits by 10%. The idea that one is more certain than the other and can be counted on for retirement while the other not is just silly mental accounting. Both are subject to political decisions.
Jack,

Respectfully, you are way off the mark. 401(k) distributions are taxed as ordinary income, so of course the government can raise income taxes/lower deductions so that you will pay more of your distribution in taxes. But the government cannot arbitrarily decide to claim a certain percentage of one's 401(k). 401(k)s are NOT taxed at a certain percentage, the distributions are counted as ordinary income and the taxes owed are calculated on a variety of inputs.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by montanagirl » Thu Jan 17, 2013 8:31 pm

bdpb wrote:

If carolim's reason for not offering a loan option was for some unknown reason then I might agree with you. But it certainly seems implied that no loan option was offered because the 401k committee is smarter than everyone else because they knew people would stupidly borrow their savings. If that's the case then I think the criticism is warranted.

Maybe caroljim would like to explain her reasoning. If I'm all wet, I'll gladly apologize.
This was one of the options presented to us at the very beginning in 1998: loans or no loans. The ones who volunteered for the committee were like me, keenly interested in retirement planning and wanting a 401k plan like other companies had. I mean, we recoiled at the thought of loans and unanimously decided against. Maybe if we had known how common 401k loans were, we might have considered it. But if they were like me, they considered the savings untouchable. I already had an IRA building up and I treated it the same way. It's a priggish attitude I guess. Yes it's the employee's money, but they don't have to agree to the arrangement and could get IRAs instead. There isn't a company match anyway, which is the biggest reason for low participation.

We were probably pretty naive at the time, and we don't meet often and have never revisited the issue. The company owners are pretty conservative, financially, and finance operations from revenue. I.e., they don't borrow either. So they probably like it the way it is.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by bdpb » Thu Jan 17, 2013 8:50 pm

leonard wrote:
bdpb wrote:
caroljm36 wrote:I'm on the 401k committee where I work and we decided from the get-go that we didn't want people to be able to borrow their savings. That's one reason we have only about 80 participants out of a possible 200.
Why would you make that decision for other people? They may or may not make the right decision, but please let them decide for themselves.

Let people borrow money from their 401k. They may not be able to get financing any other way. You may not think it's right, but it may still be an optimal solution for them.

You may be adding to the problem of people not saving money in their 401k in the first place. As your numbers point out, many people will not save in their 401k if they can't get to the money until they are retired. Those same people are likely not to save at all if it isn't take right out of their paycheck.
Why? Because as a 401k plan administrator you have a personal, fiduciary duty to represent the best financial interests of the employees of the plan. Some might argue - and I would be one of them - that it goes against being a good fiduciary. I think it's a strong argument that offering a loan plan with loan origianation and maintenance fees, is as neglectful as offering funds with 2% ER's. Plus, it adds to the plans complexity of administration to offer and track all this stuff.

A 401k is a retirement account - not a loan account. Keep everyone contributing and focusing on retirement AND not scheming on how they can get at that money earlier. And, keep administrative costs low by eliminating the complexity of a 401k loan program. Besides - when they roll out of the plan - something like one third of participants cash out then. They can wait.
Are you serious or are you just playing devil's advocate?

I fail to see how offering a loan plan with origination and maintenance fees is neglectful? People who don't take a loan don't have to pay those fees. Only the people who have a need for a loan must pay the fees.

I think a stronger argument is that it's a fiduciary duty to allow people to borrow from their 401k. It's written into the law that loan provisions can be provided.

Why do you think people are SCHEMING to get their own money out of their 401k? It seems silly to me that someone would be thinking, "I'll put this money in my 401k so that tomorrow I can borrow/withdraw it and pay fees and penalties". Just doesn't make any sense.

So, some portion of the 401k participants take a loan and one third of them cash it out. How do you know that that's not optimal for them? What if they've knowingly contributed to save 25% in taxes so that next year when they go on a sabbatical and are in the 0% tax bracket their only cost for a loan/withdrawal is a 10% penalty. Looks like a significant savings to me. Instead, you'd rather see 60% of employees not participate.

The only argument that I can agree with is that it may cost more to run the plan that offers loan options. In this case, meet your fiduciary duty and shop around, you might be able to find a cheaper administrator.

Let me repeat from my previous post. The whole context of this thread is that people are dumb for borrowing/withdrawing from their 401k. That may be so, but I don't see why one should deny other participants in the plan a responsible use of the loan provisions of the plan.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Jack » Thu Jan 17, 2013 9:02 pm

NYBoglehead wrote:But the government cannot arbitrarily decide to claim a certain percentage of one's 401(k).
Sure they can. They can and have decided to tax capitals gains at a fixed rate. They can and have decided to tax dividends at at fixed rate. They can certainly decide to tax 401(k) withdrawals at a fixed rate.

I'm not saying that this will happen. I don't think any of these things are worth worrying about. I'm just saying that it is an illusion to think that a 401(k) account is any less subject to arbitrary changes than Social Security because of "ownership". I think Social Security is just as certain as my retirement accounts. No more, no less.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by bdpb » Thu Jan 17, 2013 9:11 pm

caroljm36 wrote:
bdpb wrote:

If carolim's reason for not offering a loan option was for some unknown reason then I might agree with you. But it certainly seems implied that no loan option was offered because the 401k committee is smarter than everyone else because they knew people would stupidly borrow their savings. If that's the case then I think the criticism is warranted.

Maybe caroljim would like to explain her reasoning. If I'm all wet, I'll gladly apologize.
This was one of the options presented to us at the very beginning in 1998: loans or no loans. The ones who volunteered for the committee were like me, keenly interested in retirement planning and wanting a 401k plan like other companies had. I mean, we recoiled at the thought of loans and unanimously decided against. Maybe if we had known how common 401k loans were, we might have considered it. But if they were like me, they considered the savings untouchable. I already had an IRA building up and I treated it the same way. It's a priggish attitude I guess. Yes it's the employee's money, but they don't have to agree to the arrangement and could get IRAs instead. There isn't a company match anyway, which is the biggest reason for low participation.

We were probably pretty naive at the time, and we don't meet often and have never revisited the issue. The company owners are pretty conservative, financially, and finance operations from revenue. I.e., they don't borrow either. So they probably like it the way it is.
Unfortunately, this is precisely the thought process that I expected when the decision was made. Thanks for being so honest.

I would think if the owners were pretty conservative financially they might think it was a good idea for people to save for their retirement. In that case, offering matching contributions would likely increase participation (as studies have shown).

Unfortunately, one can't borrow from an IRA so they would be no more likely to contribute to an IRA than a 401k if that was holding them back.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by NYBoglehead » Thu Jan 17, 2013 9:11 pm

Jack wrote:
NYBoglehead wrote:But the government cannot arbitrarily decide to claim a certain percentage of one's 401(k).
Sure they can. They can and have decided to tax capitals gains at a fixed rate. They can and have decided to tax dividends at at fixed rate. They can certainly decide to tax 401(k) withdrawals at a fixed rate.

I'm not saying that this will happen. I don't think any of these things are worth worrying about. I'm just saying that it is an illusion to think that a 401(k) account is any less subject to arbitrary changes than Social Security because of "ownership". I think Social Security is just as certain as my retirement accounts. No more, no less.
Taxing 401(k) withdrawals at a flat rate would never happen. Chances are it would be highly regressive which is the polar opposite of the income tax. 401(k) contributions are deductible across every single income tax bracket so to not tax them at all bracket levels upon withdrawal would be highly inefficient.

As far as Social Security goes, we are getting closer and closer to the year when people will have to acknowledge the funding shortfall. I think Social Security is a fine system but to deny that no funding problem exists is woeful ignorance. Every year around my birthday I get a statement from the Social Security Administration. It says if nothing changes come 2037 the government will be able to pay 77 cents for every dollar of calculated benefits. I will 53 when that happens, forgive me if I think that my 401(k) is more valuable to me than Social Security.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by freebeer » Thu Jan 17, 2013 9:27 pm

Jack wrote:
NYBoglehead wrote:But the government cannot arbitrarily decide to claim a certain percentage of one's 401(k).
Sure they can. They can and have decided to tax capitals gains at a fixed rate. They can and have decided to tax dividends at at fixed rate. They can certainly decide to tax 401(k) withdrawals at a fixed rate.

I'm not saying that this will happen. I don't think any of these things are worth worrying about. I'm just saying that it is an illusion to think that a 401(k) account is any less subject to arbitrary changes than Social Security because of "ownership". I think Social Security is just as certain as my retirement accounts. No more, no less.
Not so. For traditional flavor 401(k) you don't pay income tax now and you compound without paying any tax, in exchange you pay income tax on withdrawals. What is uncertain is only what the future income tax rate will be... that's the deal you make in doing 401(k). It's really no different than holding on to appreciated stock - you know you'll have a tax bill due but you don't know what your tax rate will bein the future when you sell. For both scenarios you have a property interest be it your 401(k) account or the appreciated stock. For both scenarios you have uncertainty about your net spendable amount because of future tax rates but that's a fundamentally different kind of uncertainty than about future Social Security benefits which are not per se a property interest.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by bogleblitz » Thu Jan 17, 2013 10:25 pm

I was thinking about taking a 50k loan from 401k as a downpayment for an investment property. Everything I read so far in this thread sounds like this is a very bad move.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by NYBoglehead » Thu Jan 17, 2013 10:30 pm

bogleblitz wrote:I was thinking about taking a 50k loan from 401k as a downpayment for an investment property. Everything I read so far in this thread sounds like this is a very bad move.
Very bad idea. Buying investment property has risks to begin with, no need to compound the risk by borrowing from what should be your retirement nest egg.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by NorCalDad » Thu Jan 17, 2013 10:42 pm

bogleblitz wrote:I was thinking about taking a 50k loan from 401k as a downpayment for an investment property. Everything I read so far in this thread sounds like this is a very bad move.
I wouldn't take out a 401(k) loan for any reason unless you had a like amount of liquid cash elsewhere that you could use to pay off the loan at a moment's notice. In that instance, you're taking out the loan only because the interest rate is better than you can get elsewhere, like I presume Bob's not my name did.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Fri Jan 18, 2013 4:39 am

I have found all this discussion of how the government owns your 401k quite persuasive regarding the goodness of 401k loans. Taking my money in and out of my 401k with no tax penalty whatsoever is a fun exercise that asserts my authority over the funds, even if the government owns them, and underscores my freedom to take possession of my money under today's tax conditions if I so choose. And there are so many more ways to do that, because the government is a very liberal owner of my retirement accounts -- and the trend is toward more liberality. Only recently have we been able to convert our pre-tax IRAs to post-tax IRAs (and vice versa) under today's tax conditions. Years ago a couple couldn't withdraw $20,000 penalty-free from their TIRAs for a first home purchase; now they can. Just a few weeks ago a new law was passed allowing employers to allow employees to convert pre-tax 401k funds to post-tax 401k funds under today's tax rates. You can withdraw contributions from a Roth IRA any time you feel like it. You can withdraw from a TIRA tax-free and penalty-free to pay for medical expenses. In a wide variety of specific circumstances you can contribute to a TIRA today and withdraw from it tomorrow and save hundreds or even thousands of dollars in taxes by doing so. A new law allows you to give your IRA to charity under favorable tax circumstances. You can leave your IRA to your heirs -- any heirs you pick, not necessarily your dependents.

So the 401k and the IRA, each in its many forms, are wonderfully adaptable tools that creative Americans can use to optimize their retirement savings and tax burden. I am so persuaded of the government ownership of both 401k and Social Security that their equivalence on this score and non-equivalence on the versatility score convince me that SS should be abandoned by the side of the road like a dull and tired toy that does nothing interesting and provides little scope for creativity.

I must confess that I am one of those 401k participants who decided to participate because of (anticipated) withdrawal freedom. When I was 25 I had my first opportunity to contribute, and, being ignorant, I was leery of the 401k, but then a presidential candidate started championing the easy raiding of retirement accounts to buy real estate, and I saw the future. So I contributed, and indeed laws were later changed granting more and more freedom to use the funds for purposes other than retirement.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Fri Jan 18, 2013 4:44 am

NorCalDad wrote:
bogleblitz wrote:I was thinking about taking a 50k loan from 401k as a downpayment for an investment property. Everything I read so far in this thread sounds like this is a very bad move.
I wouldn't take out a 401(k) loan for any reason unless you had a like amount of liquid cash elsewhere that you could use to pay off the loan at a moment's notice. In that instance, you're taking out the loan only because the interest rate is better than you can get elsewhere, like I presume Bob's not my name did.
I took a loan because I didn't have the cash (kids in college). Again, my 401k doesn't have an employment requirement. I borrowed at 3.25% to avoid paying PMI. The home purchase fell through and I repaid the loan.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Rodc » Fri Jan 18, 2013 8:01 am

even if the government owns them,
Government does not own your 401K any more than they own your paycheck. Yes, they can tax your income, but do you consider that they own your job? They can tax your property. Do you consider that they own your house? They can tax your capital gains or interest, do you consider they own your savings account? Who decides what you invest in? Who decides when to rebalance? Who decides when and how you will spend it? (RMD does not count as while you do need to finally pay taxes, you can turn around and reinvest if you wish).

This is just spin, hyperbole. Ignore the noise. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by NYBoglehead » Fri Jan 18, 2013 9:00 am

Rodc wrote:
even if the government owns them,
Government does not own your 401K any more than they own your paycheck. Yes, they can tax your income, but do you consider that they own your job? They can tax your property. Do you consider that they own your house? They can tax your capital gains or interest, do you consider they own your savings account? Who decides what you invest in? Who decides when to rebalance? Who decides when and how you will spend it? (RMD does not count as while you do need to finally pay taxes, you can turn around and reinvest if you wish).

This is just spin, hyperbole. Ignore the noise. :)
Correct. As I indicated earlier, even though distributions are taxable, we as thinking human beings and not helpless victims can develop something called a "plan" so that our tax liability can be limited.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Bob's not my name » Fri Jan 18, 2013 10:06 am

The satire was too subtle?

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Re: Washington Post Article About People Raiding 401k Accoun

Post by cvn74n2 » Fri Jan 18, 2013 10:55 am

I am one of those who accessed my 401k (actually TSP) via a loan to payoff a high interest rate mortgage (8%). The benefits I see are the opportunity savings of not paying that rate and paying back the loan to myself. The opportunity cost is being out of the market which is minimal in my case since I use TSP G as the money leg of my Permanent Portfolio retirement plan making my rate of return about equal (interest on loan vs. current rate). In addition, I am still maximizing my contributions to TSP while adding the mortgage interest money saved to my IRA. All in all, this was a sound financial decision in my personal case and am glad a loan provision was available. In fact, I should have done it sooner.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by grabiner » Fri Jan 18, 2013 8:53 pm

cvn74n2 wrote:I am one of those who accessed my 401k (actually TSP) via a loan to payoff a high interest rate mortgage (8%). The benefits I see are the opportunity savings of not paying that rate and paying back the loan to myself. The opportunity cost is being out of the market which is minimal in my case since I use TSP G as the money leg of my Permanent Portfolio retirement plan making my rate of return about equal (interest on loan vs. current rate).
If you take out a TSP loan entirely from the G fund, you have no lost opportunity cost, since the TSP loan rate is the G fund rate; your TSP will grow at the same rate whether you have a loan or not. (And even if you don't have your entire TSP in the G fund, you can take out your loan from the G fund by increasing your TSP stock allocation when you take out the loan).

Thus using a TSP loan to pay off a higher-interest loan is a good deal, as long as your government job is secure. (If you lose your government job, you have to repay any TSP loan immediately, or else it becomes a distribution subject to tax and possible 10% penalties.)
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Re: Washington Post Article About People Raiding 401k Accoun

Post by Goldfinger » Sat Jan 19, 2013 12:27 pm

mack123 wrote:As someone who used to work in a 401k call center for a major institution, i can confirm that lots of people raid their 401ks, and lots of people lack fiscal intelligence.

Some people even referred to their 401k as their emergency spending money. The best was people who used the salary deferrals as a forced way to save for holiday presents.
I can certainly confirm mack123's comments. I, too, worked as a relationship manager in a call center for a huge insurance company back in the mid 90's. In each of the 2 annuity distribution channels that I managed, the phone reps in our call center would share stories of clients raiding their accounts for the most trivial of reasons. From "We need to buy a kitchen dinette set" to "our daughter got pregnant several months ago and we have to pay the hospital bill because boyfriend was too scared of any commitments so he skipped out..."

I know, it's their money, and I really am into "letting people do what they want to do." But it all comes down to this for me: This excessive "freedom" to withdraw imposes massive costs on the rest of us, because we're going to eventually have to bail these folks out when we've played by the rules. The first order of business, as someone else alluded to, is the have a healthy emergency fund.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by Rodc » Sat Jan 19, 2013 7:19 pm

Bob's not my name wrote:The satire was too subtle?
Quite possibly.

:)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by zvez » Sun Jan 20, 2013 2:19 pm

I work with educated, intelligent people, and yet most of them put more thought and research into their next droid phone or big screen tv. They're only vaguely aware of their 401k when they get the quarterly statements.

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Re: Washington Post Article About People Raiding 401k Accoun

Post by leonard » Sun Jan 20, 2013 5:55 pm

bdpb wrote:
leonard wrote:
bdpb wrote:
caroljm36 wrote:I'm on the 401k committee where I work and we decided from the get-go that we didn't want people to be able to borrow their savings. That's one reason we have only about 80 participants out of a possible 200.
Why would you make that decision for other people? They may or may not make the right decision, but please let them decide for themselves.

Let people borrow money from their 401k. They may not be able to get financing any other way. You may not think it's right, but it may still be an optimal solution for them.

You may be adding to the problem of people not saving money in their 401k in the first place. As your numbers point out, many people will not save in their 401k if they can't get to the money until they are retired. Those same people are likely not to save at all if it isn't take right out of their paycheck.
Why? Because as a 401k plan administrator you have a personal, fiduciary duty to represent the best financial interests of the employees of the plan. Some might argue - and I would be one of them - that it goes against being a good fiduciary. I think it's a strong argument that offering a loan plan with loan origianation and maintenance fees, is as neglectful as offering funds with 2% ER's. Plus, it adds to the plans complexity of administration to offer and track all this stuff.

A 401k is a retirement account - not a loan account. Keep everyone contributing and focusing on retirement AND not scheming on how they can get at that money earlier. And, keep administrative costs low by eliminating the complexity of a 401k loan program. Besides - when they roll out of the plan - something like one third of participants cash out then. They can wait.
Are you serious or are you just playing devil's advocate?

I fail to see how offering a loan plan with origination and maintenance fees is neglectful? People who don't take a loan don't have to pay those fees. Only the people who have a need for a loan must pay the fees.

I think a stronger argument is that it's a fiduciary duty to allow people to borrow from their 401k. It's written into the law that loan provisions can be provided.

Why do you think people are SCHEMING to get their own money out of their 401k? It seems silly to me that someone would be thinking, "I'll put this money in my 401k so that tomorrow I can borrow/withdraw it and pay fees and penalties". Just doesn't make any sense.

So, some portion of the 401k participants take a loan and one third of them cash it out. How do you know that that's not optimal for them? What if they've knowingly contributed to save 25% in taxes so that next year when they go on a sabbatical and are in the 0% tax bracket their only cost for a loan/withdrawal is a 10% penalty. Looks like a significant savings to me. Instead, you'd rather see 60% of employees not participate.

The only argument that I can agree with is that it may cost more to run the plan that offers loan options. In this case, meet your fiduciary duty and shop around, you might be able to find a cheaper administrator.

Let me repeat from my previous post. The whole context of this thread is that people are dumb for borrowing/withdrawing from their 401k. That may be so, but I don't see why one should deny other participants in the plan a responsible use of the loan provisions of the plan.
Dead serious.

Why not offer at least one mutual fund with an ER of 2.0%? Some people may believe that high cost equals high value, right? The reason you don't is that people may actually choose it and it would breach fiduciary duty (IMO).

Far to many people access their 401k prematurely - when a little planning and an emergency fund would serve them much better. Sure there may be cases where it may make sense - but most people worsen their financial future when taking loans. When you factor in the cost of monitoring loans and maintaining the additional complexity - it just furthers the fiduciary duty imperative.

BTW - there is no theoretical "cheaper administrator" out there for loan originating. Go ahead and contact the low cost provideds - EF, Web 401k, etc. - none of them originate and maintain 401k loans for free.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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