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401(k)’s and IRA’s Are For Suckers

This Devil’s Advocate comes straight at you and assails the one last bastion of hope for a prosperous retirement – 401(k)s and IRAs. While it probably doesn’t feel that way with the volatility in the market, conventional wisdom says that the best way to save for retirement is tax-advantaged accounts like 401(k)’s and IRAs. The power of having that money grow tax free trumps all other options.

Is that true or is that what stock market brokers want you to believe? If they were so awesome, why can’t you invest your 401(k) and IRA money in anything outside of the stock market? Want to open up a franchise? Can’t do it through your 401(k). Want to invest in your brother’s new business? Sorry, your standard IRA account won’t let you invest in that.

The financial services and investment community has made investing in the stock market as a means of security your financial future a part of conventional wisdom. They lobbied the government and worked to package it together with fancy tax advantaged accounts so that the deal is sweeter. The government is in cahoots because the more wealth that is created, the more tax revenue is collected. Everyone has a very good incentive to perpetuate this idea… they all get paid when you listen to their advice.

It’s About Cash Flow

The point of saving your money in a retirement account is so that you can generate a passive source of income when you’ve stopped working. That part is crucial for retirement, no argument there, but that doesn’t mean the only way to achieve that goal is to save in defined contributions plans like a 401(k) or IRA. There are plenty of other options out there.

One prime example, invest in dividend yielding stocks and funds. Anything you get paid out from a 401(k) is taxed at your marginal tax rate. Dividends are taxed at a special rate that is always lower than your marginal tax rate. If you’re in the 25% tax bracket, you’re taxed a mere 15% on dividends – much cheaper!

You can build cash flow the old fashioned American way, by starting a business. It’s risky but it’s also risky to give your money to a suit (or a computer) taking 1-2% off the top in the hopes that he (or she or it) makes you enough money to retire on. At least with a business, you hold destiny in your hands.

Other Investment Options

Piggybacking off the idea of building your business is the fact that all those retirement plans make it very easy to invest in the stock market and very difficult to invest in anything else. If you want to invest in rare wines, whisky, art, postage stamps or baseball cards (basically anything cool), you’ll have to open a self-directed IRA. Standard IRAs won’t let you invest in anything that doesn’t go through a broker (hmmmmmmm…). While it’s possible, it’s really difficult.

Also, once you put that money in the tax-deferred world, it’s really really hard to get it out without paying a penalty. Unqualified distributions from your 401(k) are taxed at your marginal tax rate plus a 10% penalty – ouch. Need some money to start a new business venture? Either start having bake sales or be prepared to eat the 10% penalty.

Stock Market Is A Ponzi Scheme

I wasn’t the one who said it, Dave Pollard did [3] over four years ago and Mark Cuban thinks the stock market is for suckers [4]. I’m not saying that it’s true just because someone writes it on the internet, but read those two articles and you’ll come away with an appreciation for this point of view.

Flame away!