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Using my 401K to pay off cc debt

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  • jpg7n16
    replied
    Originally posted by disneysteve View Post
    Basically, he found a loophole in the tax code.
    Sorry, how is a portion of IRC section 401, the section specifically talking about and titled "Qualified pension, profit-sharing, and stock bonus plans" considered a "loophole"?

    Isn't that section of the code specifically designed to talk about various pension plans and their features? Both defined contribution, and defined benefit?

    So a feature of a plan, talked about in the retirement plan section of the code (section 401 part(k)), to me seems like that is not a loophole, but a designed part of retirement plans. A way in a profit sharing plan to allow employees to save more money toward a retirement plan.

    Call me crazy, but that's how I view it.


    If you'd like to read through that section of the code, here it is: http://www.law.cornell.edu/uscode/text/26/401

    From: http://www.law.cornell.edu/uscode/text/26/401

    (k) Cash or deferred arrangements
    ...
    (2) Qualified cash or deferred arrangement
    A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of subsection (a)—
    (A)under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;

    (B)under which amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election—
    (i)may not be distributable to participants or other beneficiaries earlier than—
    (I)severance from employment, death, or disability,

    (II)an event described in paragraph (10),

    (III)in the case of a profit-sharing or stock bonus plan, the attainment of age 59 1/2,

    ...
    Now in the end this is all semantics. It reads to me as if the code is designed for a feature to add funds to profit-sharing and other retirement plans -- which to me reads as "save for retirement." Maybe to someone else, that reads as a loophole which can be used to save for retirement.


    So maybe I'm wrong and it originally was some loophole - some mistake. But so what? Penicillin was found as a mistake too.
    Last edited by jpg7n16; 06-05-2013, 07:39 AM.

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  • disneysteve
    replied
    Originally posted by jpg7n16 View Post
    And you keep saying that 401k's were never intended to be savings vehicles for retirement?? Do what?

    Maybe they weren't originally the only source of retirement savings, but they absolutely were/are intended to allow people to save for retirement.
    I have to side with Manthony on this one. The 401k was NOT intended to be a retirement plan. In 1980, a benefits consultant named Ted Benna realized that section 401k of the IRS code could actually be used to create a way for employees to save for retirement but that was never the intended purpose of that section. Basically, he found a loophole in the tax code.

    So yes, they do allow people to save for retirement, and it's a darn good way to do it. I wish I had one. But they weren't created for that purpose.

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  • jpg7n16
    replied
    Originally posted by Manthony View Post
    Sure it does. The whole entire stock market is a gamble. Unless you know exactly what the prices are going to be at all times, you are guessing too.. I'm sure you'll disagree, which is fine. To each his own.
    Just for the sake of the discussion: GM had DRIP plans in place before the bankruptcy. (still does - http://www.dripadvice.com/general_motors_gm_drip.html )

    GM then went bankrupt. So stocks w/ DRIP programs are just as much of a "gamble" as investing in the market as a whole through funds (in the 401k or out of it). In fact, more so! Because you're less diversified by buying individual securities and have more risk of making a poor decision.

    So unless you can predict exactly where the stock will go, your investment is at more risk in a DRIP stock.

    ------------------------------------------------------

    And you keep saying that 401k's were never intended to be savings vehicles for retirement?? Do what?

    The IRS classifies them as RETIREMENT plans: http://www.irs.gov/publications/p560/index.html
    And the Department of Labor says they can be a great way to save for retirement: http://www.dol.gov/ebsa/publications/401kplans.html

    From: http://www.dol.gov/ebsa/publications/401kplans.html

    401(k) plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.
    Maybe they weren't originally the only source of retirement savings, but they absolutely were/are intended to allow people to save for retirement.


    You can whine about the plan all you want, but that won't give you a pension if your company doesn't offer it. Most Americans have to save for retirement on their own - and where will they do it?

    Social Security? - is actually still around, but out of our control, and is not enough on its own to maintain lifestyle
    Traditional Defined Benefit Pension? - if your company doesn't have it, this isn't an option
    IRAs? - limited to $5.5-6.5k/year, not enough for the average person to provide adequate retirement security
    Taxable accounts? - you miss out on the advantage of tax deferred compounding, and tax deductions for contributions

    If you're saving for retirement, and IRAs aren't enough for you, 401k accounts are great options.


    As DS said above, it's usually recommended to do the following:
    1) Take employer match
    2) Fund as much to IRA as possible
    3) Use 401k for additional savings need

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  • Petunia 100
    replied
    Originally posted by Manthony View Post
    Sure it does. The whole entire stock market is a gamble. Unless you know exactly what the prices are going to be at all times, you are guessing too.. I'm sure you'll disagree, which is fine. To each his own. Also, it was just an example to answer someone's question above about what other methods I was talking about. Wasn't meant to be some argument on how good or bad the method is. I never asked what you thought about it. It works for me. AND I still like DRIPs too. The point is to do what works for you and that there are other methods out there.
    When you are buying the entire market and holding, the only "bet" you are taking is whether or not corporations as a whole will figure out how to make profits over time. It seems a safe bet, but you are right, it is a gamble. There is no guarantee.

    Betting that the market will go up/down today, or that stock XYZ will go up/down today is not a comparable gamble.

    Leave a comment:


  • kv968
    replied
    Originally posted by Manthony View Post
    Right! Private Placements are investments for the rich. 401ks are for the middle class...or whats left of it.
    Well my $1B check didn't clear yet so I'll just have to stick my measly 401k for now

    Originally posted by Manthony View Post
    Yes, those are called self-directed accounts. Some 401ks allow a portion of your funds to be allocated to a self-directed brokerage account where you can purchase ETFs, precious metals, etc. and have much more selections on what you can buy. That's the only part that's worth it, in my book, but again, that takes more work than the average person is willing to do. But the average 401k, without a self-directed portion, would never allow you to do this. The employers plan administrator will consider them too "risky". I think its riskier to not allow people to make the choices they actually want rather than force feed them what they think you should have.

    An employer once told me, in nicer words, that the reason they wont allow other selections like that is because the average employee is too stupid to make those kinds of decisions. Those weren't exact words, but that's exactly what they were saying anyway. The least they can do is open up a self-directed portion for those who like to make their own decisions. Even then, they limit what you can put in it.
    I'm all for self-directed brokerage accounts and the freedom it'll give me in choosing some other options however I can see where plan administrators could consider them "too risky".

    I wouldn't go so far as calling people "stupid" (although you were paraphrasing) but there are quite a few who are uneducated in investing and can do real harm to their retirement accounts if allowed to purchase individual securities. Hell, I'm experienced and I know I could do some major damage if I get carried away.

    I am anxious to see how many of my co-workers are going to want to sign up for it since I've helped many of them construct their portfolios and many of them, in my opinion, shouldn't be dabbling too much in individual stocks.

    With that said, I'm still keeping a big majority of my money in the 401k proper. We have very low expense index funds and mutual funds and I'm not going to lose all of that diversification and risk it on just a few stocks.

    And I'm not sure what you meant by "they limit what you can put in it" but money-wise we can put everything in the brokerage account if its fully vested.

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  • disneysteve
    replied
    Originally posted by Manthony View Post
    Unless you know exactly what the prices are going to be at all times, you are guessing too.
    I'm not trying to argue. I just don't think that market timing is the same as dollar cost averaging. I'm not betting that a particular stock or fund will go up or down at a certain time. I'm going on the expectation that over time, decades, not days, the market will be up, as it always has been. I don't think that is a guess at all.

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  • Manthony
    replied
    Originally posted by disneysteve View Post
    Your method only works when you guess right. My method doesn't involve any guessing or market timing.
    Sure it does. The whole entire stock market is a gamble. Unless you know exactly what the prices are going to be at all times, you are guessing too.. I'm sure you'll disagree, which is fine. To each his own. Also, it was just an example to answer someone's question above about what other methods I was talking about. Wasn't meant to be some argument on how good or bad the method is. I never asked what you thought about it. It works for me. AND I still like DRIPs too. The point is to do what works for you and that there are other methods out there.
    Last edited by Manthony; 05-31-2013, 11:03 AM.

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  • Manthony
    replied
    Originally posted by BuckyBadger View Post
    or maybe I just want the casual investor reading this thread to realize that what you are talking about is something that they shouldn't get involved in.
    That was already said. Dont know why people always gotta come out with animosity just for speaking your views. So you dont agree? So what? Settle down.

    Leave a comment:


  • disneysteve
    replied
    Originally posted by Manthony View Post
    Well I think its very impressive since most people struggle to get that on a yearly basis.
    True, because most people don't know what the hell they're doing.

    As for your 17% YTD, you could just as well be down 17% over the next 6-12 months
    True, but this is a long-term investment. Let's look at the long-term returns of some of my funds. These are all 10-year average annual returns.
    Fund A: 7.87%
    Fund B: 8.00%
    Fund C: 10.06%
    Fund D: 11.08%

    I don't think those numbers are bad at all. Yes some years are better than others and some years are really awful but over time it evens out.

    My 401k at the time had a 3% guaranteed selection
    That's a great deal for the cash portion of your holdings.

    The beauty of my strategy is that I can do it in an up, down, or sideways market where yours only looks good when its up.
    This couldn't be farther from the truth as I've shown above. Remember, those 10-year averages include the 2008 meltdown and recession. Your method only works when you guess right. My method doesn't involve any guessing or market timing.

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  • Petunia 100
    replied
    Originally posted by Manthony View Post
    Well I think its very impressive since most people struggle to get that on a yearly basis. And also, that was for only 1 time period I mentioned, as an example - the fastest time period that I did that. It wasn't the ONLY time period for that year. I did the same thing several times but it took longer than 5 days.

    As for your 17% YTD, you could just as well be down 17% over the next 6-12 months while I locked in over 25% for that year total - no chance of it going down like yours has - and then the rest of the time, when I was not in the market, I was still earning 3%. Next year, Id do the same thing while your index fund could be down 17% YTD.

    My 401k at the time had a 3% guaranteed selection that was based on the assets of the firm it was administered by. They agreed to pay a fixed 3% with no fees so it made since to stash it in there for most of the time while "trading" my 401k account.

    Of course, everything is always great when things are going up. Even the average Joe thinks he's a genius (you kind of sound like this guy). But its when markets start going down and sideways that tells the tale. The beauty of my strategy is that I can do it in an up, down, or sideways market where yours only looks good when its up. When your index fund starts going down, and it will, then come back and tell me how much better it is than 3%. You'll wish you had it then.
    It is awesome that you are able to accurately predict what the market will do next and profit from that knowledge. Most professional money managers, with advanced degrees from places like Harvard Business School, can't do what you are doing. You should definately continue with your strategy, and perhaps ought to write a book or newsletter.

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  • BuckyBadger
    replied
    Originally posted by Manthony View Post
    Even within a 401k itself, I have been able to beat the average performance of the funds included just by choosing what times I actually stuck money in one. Staying largely out of the market - with money held in a cash account in the 401k - then only buying into one of the funds in certain times when I think the market is going up, since 401ks only include funds which are designed to go up when the general market is up. (They are horrible accounts when the market is going down or sideways). Then I'd sell out of the fund after Ive made my target percentage and go back to the cash account. Then repeat. During market downturns, which 401ks are not designed to handle, I would usually not even be invested - that's why I'd use a separate cash account so I can use Inverse ETFs, which are designed to go up when the market is heading down. I was able to generate 20%+, when the average performance was not even close to that, in a year doing this, in a 401k, when I was actually "invested" only 4 times the whole year, and never longer than a couple of months each time. 1 time it was only for 5 days. The rest of the time, I just parked the money in the cash account at 3%. During downturns, this 3% guaranteed account beats the pants of anything else - even in your 401k - when everything else is going down. But again, the average person would not know or do this.

    But for the average person, Id recommend they take their favorite index mutual fund, look at the strongest companies which pay dividends over time, then see if they offer a DRIP plan and just stash cash in those. They will beat the mutual funds performance over time. Even this may be too much work for the average person though!

    "Train yourself to let go of everything you fear to lose." - Jedi GrandMaster Yoda
    So you're advocating market timing and being heavily invested in individual stocks. Which are two cardinal sins to any smart investor.

    Staying the course and diversity of investments have proven to work over time (along with asset allocations appropriate for your risk tolerance and keeping fees to a minimum).

    You're using a lot of words, but what you're saying is still crazy.

    (Also, a 3% cash account is pretty much unheard of in today's environment, but that's the least of my concerns with your statements.)

    I'm sure you'll follow this post with another one of yours full of sound and fury signifying nothing, but I guess I'm a glutton for punishment - or maybe I just want the casual investor reading this thread to realize that what you are talking about is something that they shouldn't get involved in.

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  • Manthony
    replied
    Originally posted by disneysteve View Post
    While making 9% in 5 days is nice, if the rest of the time you were in cash earning 3% (I'm curious how you're getting that return on your cash by the way), that 9% really isn't so impressive.

    My S&P 500 Index Fund is up 17.03% YTD as of yesterday and 16.86% for the 12 months ending 4/30/13. That's a lot better than 9% for 5 days and 3% the rest of the time.
    Well I think its very impressive since most people struggle to get that on a yearly basis. And also, that was for only 1 time period I mentioned, as an example - the fastest time period that I did that. It wasn't the ONLY time period for that year. I did the same thing several times but it took longer than 5 days.

    As for your 17% YTD, you could just as well be down 17% over the next 6-12 months while I locked in over 25% for that year total - no chance of it going down like yours has - and then the rest of the time, when I was not in the market, I was still earning 3%. Next year, Id do the same thing while your index fund could be down 17% YTD.

    My 401k at the time had a 3% guaranteed selection that was based on the assets of the firm it was administered by. They agreed to pay a fixed 3% with no fees so it made since to stash it in there for most of the time while "trading" my 401k account.

    Of course, everything is always great when things are going up. Even the average Joe thinks he's a genius (you kind of sound like this guy). But its when markets start going down and sideways that tells the tale. The beauty of my strategy is that I can do it in an up, down, or sideways market where yours only looks good when its up. When your index fund starts going down, and it will, then come back and tell me how much better it is than 3%. You'll wish you had it then.
    Last edited by Manthony; 05-31-2013, 07:47 AM.

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  • disneysteve
    replied
    Originally posted by Manthony View Post
    That's exactly how I was able to make 9%+ in 5 days in a 401k
    While making 9% in 5 days is nice, if the rest of the time you were in cash earning 3% (I'm curious how you're getting that return on your cash by the way), that 9% really isn't so impressive.

    My S&P 500 Index Fund is up 17.03% YTD as of yesterday and 16.86% for the 12 months ending 4/30/13. That's a lot better than 9% for 5 days and 3% the rest of the time.

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  • Manthony
    replied
    Originally posted by dczech09 View Post
    But yeah this strategy that you describe is not something I would recommend for the Average Joe.
    Yea, that strategy is more for people who like to watch market trends and such. And stay on top of that kind of thing. But it is an effective way to "trade" your 401k account and make more money within it, even with the limitations placed upon it. During one 5 day period, I jumped in the market with one of the large cap funds and made 9% and then put it all back in the cash account again. I caught a very good uptrend for a few days but I mostly try to stay out most of the time and in the cash account.

    When I see an uptrend, I try to jump in - usually after there's been a major shake out (say DOW lost 250+ points or something like that) Then there's usually a strong chance of a bounce. I love those. You KNOW the market will be down that day, so you buy your mutual fund that same day before 4pm since the funds wont register in your account until the next day. That way, you got in at the lower closing price for that day, and can catch the bounce that's coming (or may be coming, I should say). If you wait until the next day to buy in, then you just lost your chance to catch the bounce because it will be at the NEXT days closing price, which is now higher, not the day before's price.

    I am going for absolute returns with such a strategy rather than the relative returns which mutual funds are based on. In this way, I can beat the crap out of their relative returns, even with a 401k. Its really a simple strategy actually.

    The BIG down days are my favorite strategy to play like that. That's exactly how I was able to make 9%+ in 5 days in a 401k, then get back out and park it in the cash account. Sometimes I may decide to park it in a bond fund, considering the fees, and what I think I can get if I leave it there for several months while waiting for the next big move. If I think I can get more than 3% during that time, then I would choose one of the bond funds for the time being - so it all depends. Then I patiently wait for the next opportunity to make a move back in. Of course its not 100% and I expect to be wrong 85% of the time, but you only need to be right 15% of the time to make some decent money this way. This is where position sizing would come in handy too - and of course, lots of patience to not be "invested" in something.

    I came up with this strategy myself, by the way, just by watching the market all the time, and when the 401k actually purchases the shares for you (which they always do at the same time as a policy) and at what price. This information can supersize even your 401k returns.
    Last edited by Manthony; 05-31-2013, 07:02 AM.

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  • disneysteve
    replied
    Originally posted by Manthony View Post
    But for the average person, Id recommend they take their favorite index mutual fund, look at the strongest companies which pay dividends over time, then see if they offer a DRIP plan and just stash cash in those. They will beat the mutual funds performance over time. Even this may be too much work for the average person though!
    I disagree that the average person should be forging mutual funds and picking individual stocks instead. I think that's a recipe for disaster. You've mentioned professional traders who outperform the markets. Those people certainly do exist but they are a tiny minority of investors. Most traders lose, plain and simple. And even those who ultimately become successful usually do so only after years of getting to that point during which time they lose tens of thousands of dollars.

    For the average worker, I think a 401k is the way to go. Is it perfect? Nope. But it is far better than them doing nothing at all or playing hunches or following stock tips from some internet forum. And even better is automatic enrollment which forces people to save. Every study done has shown the benefit of that approach.

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