Rethinking 401Ks for Growth and Tax Efficiency

• IRON100
• September 25th, 2009

401Ks seemed like an easy way for young workers to build a retirement nest egg without thinking too much, particularly when employers were matching contributions as much as 6%. Now that many small employers are either out of business or freezing their contributions (in some cases, ENDING matching), the 401K has the unenviable position of being depleted by recent market declines AND no longer a way to earn free money via matching. Two articles address the key issues that deal with young workers that have 401Ks and the potential for opting out and using a Roth IRA as an alternative. 

The other article deals with tax deferral issues related to older workers with 401Ks..

Getting control of retirement assets allows one to manage them with the independence to decide asset allocation and risk without limiting asset classes. If one can shift assets into them without huge tax implications, Roth IRA contributions accrue to the owner, tax free for the rest of the owner's life, as long as Roth IRA tax rules do not change. This is particularly true the younger one is, because in all likelihood one's income will be below Roth IRA maximums, and one will have lots of time to invest. Younger workers need to keep their eyes open to self-managed alternatives, because many of you will have multiple job changes in your career. The better able one is able to control one’s assets and tax deferrals, the better one will be able to control the growth of one’s investments. 

We (and particularly I) will be addressing these issues in future posts. The time for 20-somethings to plan for retirement is NOW, not later. The time to be tax efficient is now for those who are 40 and above. 20-somethings have a large time horizon: 40 and above workers hopefully have an asset base to protect. 

More on these subjects are coming soon. Stay tuned.

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