N'DIGO - MoneySmart Guy Matthew Sapaula

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Is Owning an IRA or 401(k) a Ripoff? Changing Economy Revealing Answers

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Matt Sapaula

I am a proud father, financial strategist, TV commentator and financial talk show host of Money Smart Radio

"I don't own an IRA or 401(k)!  Never have, never will!" says financial strategist and NY Times best-selling author Douglas R. Andrew.  "It is the time NOW to convert these traditional retirement plans to better ones," he says.  Which ones? 

"Tax-free ones!  Plus, your account values and income tax rates are lower due to our economy.  Why would you want to wait around to do something about your IRA or 401(k) retirement plan, hoping that you will recover what you have lost!", Andrews emphatically states.

Let's rethink this. Why have we always been told to put money into an IRA (Individual Retirement Account) and look for a job with a solid paycheck and 401(k) plan? WHO told us to do this and WHY?

With many banks today posting mixed reports about their profits and losses, who knows how long our economy will take to recover. Our nation's biggest bank, who made a decision to repay back TARP bailout money to the American taxpayers still posted a $5.2 billion loss!


There is always an upside to a downside, an opportunity within a problem. This whole month, I will post some thoughts, ideas and actionable steps in how to disinherit your favorite Uncle for your hard-earned cash (yes, that's Uncle Sam).

The more you keep funding your 401(k) plan, over and above what your employer matches you, is unnecessary money exposed to federal/state income taxation when you withdraw this money at potentially a higher income tax rate later in life when you need this money the most.

My mentor and I, Douglas Andrew who has authored Missed Fortune, Last Chance Millionaire and Millionaire by 30, have been teaching wealth-building and retirement planning workshops all across the country addressing what Americans need to do to stay in front of the Tax Tidal Wave that is building up.

We ask this simple question. "Do you think future income tax rates will be lower, the same or HIGHER?" The whole audience shouts, "HIGHER!"

If so, they why do we think that continually putting money in traditional retirement planning vehicles such as IRAs, 401(k)s, deferred compensation plans, 403(b) tax-sheltered annuities, is a great idea?

Did you know that 401(k) stands for Internal Revenue Code 401(k)?  Yes, it's TAX CODE!  Do you think that is a mistake?  Hmm...

Even the people who have installed 401(k) plans into major corporations across America are starting to take note of disparities in these plans which do not create a level playing field for workers.  We discussed this during our Chicago-based financial talk radio show in November how Brooks Hamilton, a pension benefit consultant since the President Eisenhower days, is creating massive public awareness to this problem.

Do I believe that an IRA or 401(k) is a terrible way of saving for the future?  No, it's a good plan and your should do you own research.  However, since it is my money, I want to find the BEST plan.  And that means finding a way to make sure Uncle Sam and cousin Illinois do not have a hand in MY cookie jar.

Are you willing to get out of this problem? Stop asking the people at your job for advice, most people are unaware of this problem and let's face it...most people don't understand money no matter how educated they are.  Unless they stay on top of money issues 9-5 as much as you stay on top of your job...you better look for better counsel.

You can begin interviewing financial professionals that share your same value system, principles and ethics.  Just because they have a fancy office doesn't mean they are on top of these important issues.  And don't just take them for their word...their lives will validate what they say.

Once you find someone you can trust, ask this financial advisor, financial planner, wealth-building coach or life insurance specialist on the "TAX-FREE PLANS" similar to the ones that Douglas Andrew is talking about and how to best position yourself financially within them. 

But don't hold your breath with traditional advisors guiding you along to implement traditional financial strategies.  They may end up giving you the deer-in-the-headlights look.  That's because they are most likely maximum funding their IRAs and 401(k)s too.


P.S. Do you want to hear a really cool podcast of financial mistakes and experiences of a nuclear scientist? And he thought he and his family had it together...CLICK HERE.

P.S.S. Your comments and opinions below are welcome.  But if you have a situation you'd like help with and don't want to drop a comment on this post in fear of "airing out your personal info to the world" or have personal feedback or suggestions, please email me: mgs@moneysmartradio.com

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6 Comments

KevinHudoba said:

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3-4% interest annually is pretty pathetic in your IRA/401k. This is why I personally invest for the future @ http://www.geniusfunds.com/?c=945719.
I earn a minimum of 1% interest per DAY, AND I have the option to withdraw that interest or continually re-invest it. Better yet, the entire amount invested can be liquid every 150 days (And you can put it under a corporation name for all the tax benefits).

After using an investment vehicle like this, an IRA or 401k is nothing more than a bad joke.

Matt Sapaula said:

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Hey Kevin! Thx for dropping by! Interesting affiliate link there...at least worth checking out. Personally, these HYIP (High Yield Investment Programs) are still questionable and that people should know their money is going offshore. The are domiciled here:

6 Karaiskakis Street
3032 Limassol - Cyprus

What is even more important in the theme of this post, is the tax-treatment of our IRA and 401(k) plans later in life, rather than the rate of return we are getting or investment choices within them.

I like your ideas...keep 'em flowin!

Paul Petillo of Target2025.com said:

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Matthew,

You bring up a good point but I think you are missing a few along the way. True taxes are unknown in the future and will likely go higher. But 401(k)'s assume, and in many instances correctly so, that your current tax rate is higher than the future one will be. Deferring those taxes (as both the 401(k) and IRA do) will net a tax savings significant enough to be considered.

And in the case of the 401(k), the employer match, even as some companies have curtailed or eliminated it, is still a worthwhile event worthy of very serious consideration.

Tax-free investments are wonderful but they are made with dollars that were taxed at your current rate. The debate then should be, which is lower, now or some far off future date? If you know for a fact, do tell. It is this missing unknown in all of our plans! I have suggested one way to improve the 401(k) is to offer a set rate as the best way to offer future incentives to investors now and better enable us to estimate the future distribution mark.

Tax-free plans (munis and Roths) are still exposed to risk and if there are rewards, they will be taxed as well.

You are right, we do tend to herd behind the opinion we like most, follow the followers even if there is no real leader and make the same investment mistakes time and again, but some are a fact of life. A 401(k) with a match and invested with at least 5% of a workers pre-tax income is something no one should be warned off or told is no good.

Matt Sapaula said:

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Thx for your comments Paul! As you know, we can both easily write pages and pages of key points on this one key topic in retirement and financial planning.

I agree with you about taking advantage of the matching contributions that an employer makes to your 401(k) plan in paragraph 6.

By the way, where do you find that the rewards of Roth IRAs will be taxed? The only taxation on ROTH IRAs after the 5 year holding period with withdrawals after age 59 1/2 are ZERO!

I thank you for your opinion and please, I would like you to write a guest post on our radio show blog to talk more about your book! http://www.moneysmartradio.com/contact/submit-an-article/

Paul Petillo of Target2025.com said:

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Of course you are right about that. Too often I am confronted with folks tapping those types of retirement investments long before that, using the "already-taxed" portion of the investment as a sort of emergency cash fund. And not long after that, they begin to tap their gains and then the taxes (and penalties) kick in. In a perfect world, the investor would pay nothing. As you well know, it hasn't been quite as perfect of a world as most of us would like.

And thanks for the invite. I'm going to take you up on it.

Reins Financial Group said:

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Mr. Sapula,
I found your article very interesting and wanted to share a couple of quick thoughts. First off, as you've noted in the comments to this article, Roth IRA's are an option to pay tax now (similar to any other non-deferred retirement savings mechanism). More importantly though, you should consider the benefits of using IRA's and 401(k)'s outside of the simple saving mechanism. While I agree that leaving funds in a standard IRA account seeing little to no return on a mutual fund is not the BEST means of saving for one's retirement, but utilizing deferred funds to achieve higher returns and then paying the tax upon realization of the income incrementally may well be. We need to consider that while your shouting public may always assume that the income tax rates will be "HIGHER" in the future, it is by no means necessarily true. Consider that 50 years ago (when many current retirees were beginning to consider saving) the income tax rate was as high as 90%. While we always like to think of taxes as something that go up and not down, that is simply not the case. In the end, taking the advantage that you are given to defer payment is no simple question.
Reins Financial Group - take the reins to your retirement account.
It's your retirement account, make the investments you want to make.

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