Thursday, January 31, 2008

Stop Contributing to 401k?

The Boston Gal put up this Boston Globe article. It suggests stopping investing in your 401k and instead put the money into taxable accounts. This will help with tax diversification. So stop overdoing your 401k. This way as the market tanks you can take advantage of the losses and lower you tax bill.

Overall sounds like a good plan right? Plus economists say they don't know where tax rates are heading, so why put money away in a retirement account. Another good point. Plus they suggest writing off losses in taxable accounts against gains, something you can't do in retirement accounts.

I agree it does make sense in some ways. But major flaw in the article is assuming that people will save the money they no longer dump into a 401k into a taxable account. We all know the reality is that people barely contribute to their 401k as is. US personal savings rate is -0.5%. So whose to say that someone contributing 5% to their 401k will turn around and contribute 3% to a taxable account instead?

Is that realistic or reasonable? So the only option is to not stop saving into retirement accounts. If people stop, will they save the excess or just spend it. We're better off not tampering any savings, considering the problems we as a society have in general with saving.


Fabulously Broke in the City said...

Agreed.. the assumptions are flawed. People need to save MORE, and using the retirement plan as a vehicle makes sense to me.. unless of course, you are disciplined enough to shift that money into a savings acount and not touch it

Ryan said...

This is all based on the assumption that 401k's are that risky. They are not. Best to put into 401k, look at the overall market there hasn't been a downturn since the depression. So, if you aren't going to touch the money in say 30-40 years, then keep it in 401k.

Jim ~ said...

If you're saving money in a 401k for decades, it's going to go up and down the whole way. I think it's better to get in and stay in, and try to put more in as you can. There's nothing wrong with changing up strategy if you feel your risk is too high with stocks or something, bonds could be safer although they don't have great return. I am leaving mine alone and not touching it, weather the storm and the sun will come out again.

Living Almost Large said...

It's more about diversification of taxes. That if you retire early and don't want to put it all in at tax deferred shelter so you can use it before 59.5 is the reason to bulk up.

Plus you can write off losses like during this year if it were in a taxable account. True, but you still have to save the 5% that was going into the 401k into a taxable account.

Sigh...I mean whose really going to do it?

LJ said...

The problem that I see with these is if people actually do this, they may be affecting the other participants of the 401K plans.
My husband is in a plan that is "top heavy" so, he is not allowed to contribute the maximum to his 401K.
The amount he is allowed to contribute is based on what other participants are contributing, so if people stop contributing to his plan, he will be forced to contribute even less.
I also think this is a bad idea in the long run, the more money you contribute to a 401k, the more potential you have over the course of years leading to retirement.
I understand this may make sense for those close to retirement, but everyone else should just stick with it.
Besides, most people in America won't save that money, they will waste it.

Peter said...

This doesn't make sense for most folks. Even the article says that, if you don't see yourself making more in retirement than you're currently making, then fully fund the tax defered and non-taxable before you worry about taxible accounts and those needs.

Most of us should be so lucky as to have this as a problem. Yeah, I'm going to retire and take away 110% of my pre-retirement earnings.