Do I understand this right?

[2speak]

Average Joe puts his money in the market as 401k's and he can't withdraw his money without a penalty. The wealthy investor puts his money in the market and withdraws it without a penalty. So if the market starts to fall the wealthy investor can pull his money out and the average Joe has to leave his in and lose his money. Then the wealthy investor after having pulled his money out can then wait until it hits bottom and then reinvest his money and make a killing. But the average Joe has lost a substantial amount of his investment and now has to wait for years to get back to where he started. Is this correct? Just trying to understand.

[amdezurik]

1. yes, you do

[prayin4rain]

2. people with 401K's can choose to invest in bonds instead... they just can't

take the money out of their 401k's and put it in their bank accounts. But your assumption has some validity in that most people with 401k's do not really keep track of what type of investments their money is in and are more likely to let it ride.

[2speak]

4. Bonds are a stable investment then? You can't lose?

[SammyWinstonJack]

7. Maybe not lose as much as fast? I really have no idea.

[prayin4rain]

8. they can go to stable investments too ... they just can't put it in their bank accounts

there are different types of bonds... all relatively stable... some more than others though. I'm just saying that the vast majority of 401kers do have options not to only invest in "the market". However, I would venture to say most do not know of their ability to change their investments or what their options are. I moved my 401k and have FINALLY stopped losing money... I'm not making any either though.

[DrZeeLit]

37. To offset tax liability later, when you cash in bonds, try to invest in "tax free municipal bonds"

if you can find them for your state.

That way, you won't have to pay taxes on the interest, as you will when/if you withdraw/sell your 401K.
The % you save actually can offset the lower initial interest % (as opposed to putting cash in a money market, CD or other non-stock investment).

Some companies, like Vanguard (very reputable btw) offer Bond Funds. Again, research the tax-free municipals for your state.
You can put bonds in an IRA, too.
For those of you younger, research the Roth IRA.

I'm NOT a financial advisor, so you gotta do your homework. I love to do research and I got burned once with a financial advisor, which taught me more than anything to become savvy. Don't know "everything," but I'm not taking a big hit yet on this "market correction." Ha! We shall see.

[prayin4rain]

47. thanks! n/t

[DrZeeLit]

118. Oops... don't put tax free bonds in IRA... you're taxed on your IRA when you take it. So with the

with the IRA... try to get the best return as you can while your money is in the IRA.
And the best at this point?
Dunno.
Againt... RESEARCH

And the previous poster (above) is right. Most people do NOT research or watch their 401K or IRA or other fund that was started through a savings plan. They do "let it ride."

Do you think brokerages are relying on that?
Not sure, but sometimes that might be the case.

I have learned to take a serious hand in my own investments. I do NOT do any "day trading" or even big changes, but I do have diversified investments which means I "usually" can't lose everything in one sweeping market drop.

Research!

[RebelOne]

50. I moved a 401K into my savings.

I'm not making any money, but I definitely am not seeing the balance drop.

[louis-t]

11. Please, it's 'l-o-s-e'.

I found my misspell of the word early today. I wonder why so many people do this?

Signed, the Spelling Police.

[2speak]

18. Please don't arrest me!

Aoccdrnig to rscheearch at Cmabrigde Uinervtisy, it deosn't mttaer in waht oredr the ltteers in a wrod are, the olny iprmoetnt tihng is taht the frist and lsat ltteer be at the rghit pclae. The rset can be a toatl mses and you can sitll raed it wouthit a porbelm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe.

[louis-t]

55. That's great, I've seen that before.

Isn't that sort of the principle that speed reading works on?

[leftchick]

86. cool!

I never knew that! :think:

[Igel]

114. Only above a certain reading speed, and for fluent readers.

Go too slow and it's gibberish.

[nadinbrzezinski]

22. They are safer... they are things like bonds to build infrastructure

at your local city

Now you still need to check for things like bond rating, as some cities have defaulted on their debt

Regardless they are LONG term

[Common Sense Party]

110. If it's a muni-bond fund, yes, it's for infrastructure, etc.

In your 401(k), your bond fund might be corporate bonds--loaning money to Bank of America, GE, etc.

[elocs]

35. Well, I keep track of my money and I moved the money in my 401k and Roth IRA into Treasury Bonds.

No penalty and my investments are safe. When things look better I can choose then to move money into the market. There was no reason I had to sit by and watch my investments lose money without doing a thing.

[sandnsea]

97. Yeah, people were told to sit tight right here

just a few weeks ago. I told them they would be called irreponsible fools by the same people telling them to sit tight.

[unblock]

3. most 401(k)'s have at least one cash-like alternative

so you can more your money from an equity fund to a money market fund or a guaranteed investment certificate.
you don't have to withdraw from the 401(k) entirely to remove it from the equity markets.

[2speak]

5. But are those without any risks? Like having your money in your

hands?

[Rabrrrrrr]

15. If you want risk-free investment, you need to move to another universe.

The closes we have to risk-free is government bonds - totally risk free unless the country itself tanks over and disappears; and in that case, the least of your worries is going to be money you had in government bonds.

CDs offer a definite return on investment as well.

The problem with the more stable and guaranteed investments is that they aren't necessarily going to keep up with inflation, and so sometimes investing in those only keeps your money from losing purchasing power, but never really gain anything in usable spending power. BUT, the beauty of them is that you also can't lose money (though you can lose purchasing power, obviously, if inflation goes up higher than the rate of return).

[napi21]

6. Sort of. Most 401K's are invested in a mutual fund group. Within

that fund group there's aalways one fund that is extremely low risk (at least there has been in everyone I've seen). Something like a money market or cash fund. There's no charge to switch between funds as long as you stay within the same fund group. You are correct that the individual can't withdraw the money without paying a penalty, but they should be able to move that money into the safe (but very low return) fund and wait it out.

[2speak]

10. Could you give me an example? A name of a fund.

[napi21]

19. NOT ME! I suggest you call a local broker. I work with a local

broker with Edward Jones, and when I have questions like that, I call him. I'm not tryin to be nasty to you, but I'm simply not capable to give financial advice to anyone.

[Common Sense Party]

62. That fund probably wouldn't be in your 401(k) plan, so why

ask for the name of a fund?

Look at the choices in your OWN plan. There are bond funds, I'm guessing. There's either a money market or a fixed account. Those are "safer" than stock funds and won't fluctuate as much (a fixed account won't fluctuate at all). Of course, they don't earn much, either.

If you have a long time to go until retirement, you can do what I do. My 401 is still fully invested in stocks. I could care less what the price of those stocks is today. I'm not retiring for another 25 years. 25 years from now, all my shares will be worth more than they are today. Meanwhile, I'm buying more shares with every paycheck now that these good companies are on sale.

Are things going to be ugly for a while? Yes, undoubtedly. I just won't look at my statements. Will things get better? Yes, undoubtedly. So I just keep plugging away. the last thing I want is to be on the sidelines when this thing turns around, because when it does it will turn around quickly.

[NeedleCast]

63. CREF Stock Account

This is one of the funds avaliable through my TIAA-CREF retirment account. It is, essentially, a bunch of publicaly traded companies (stocks). In this particular fund it is a fairly broad group of stocks which include energy, construction, production and other "big" companies. This fun would probably be assessed as fairly low risk as far as equity accounts go. It is well diversified and composed mostly of large companies with stable income. It's not likely to give astronomical profit, but it's also not likely to take a massive loss.

In a retirement fund (401k, 403b) this would be an example of a fund.

[boomerbust]

65. Sealy Posturepedic

Wisconsin Hunters For Obama

[valerief]

9. Yes. It's a rigged game.

[sinkingfeeling]

12. With mine, I can withdraw any allotment to stocks once I've reached the age of 59 1/2 without any

penalities. I cannot withdraw my annuity until I retire.

[leftofthedial]

13. you say "wealthy investor" like it didn't mean, your divinely gifted superior

and you say Joe loses his money like he's ungrateful for whatever the wealthy owners of this country let him keep.

why do you hate America?

(You are correct.)

[Rabrrrrrr]

14. No, not all - it has nothing to do with your wealth.

Money taken out of a 401(k) before retirement has a penalty attached to it - BUT, the investments within that 401(k) can be changed.

Money that is in a regular brokerage account - whether owned by a rich guy or by Joe Sixpack - can have money put in, money taken out, and investments changed willy nilly as much the owner wants with no penalties whatsoever (apart from the taxes that will be paid on capital gains, or taxes that can be taken as a loss for capital losses).

[2speak]

16. I had heard that it takes a little more than $100 dollars to

invest in stocks. That there is a minimum requirement to invest. Was that incorrect?

[Rabrrrrrr]

21. Depends on how you want to invest - if you mean a company's 401(k) plan, then no.

If you mean, through a brokerage, it depends on the brokerage as to how much of a minimum they require.

There is also the possibility of DSP and DRIP funds: see info here http://articles.moneycentral.msn.com/Investing/SimpleStrategies/InvestOneDripAtaTime.aspx

[RB TexLa]

24. No, it takes whatever the commission is plus the price of one share of a stock with most online

brokerages. If you are using an automatic investing system it takes a small minimum, such as $10 per week, or month or however you choose and a smaller commission.

[bean fidhleir]

25. The minimum varies from stock to stock. With some it's zero

[TahitiNut]

17. 401k follks are playing with PRE-TAX money.

Their 401K investments (up to limits) are TAX-DEFERRED income. Thus, they're investing money they wouldn't even have after-tax. Taxes are paid upon withdrawal ... and penalties are levied if that withdrawal doesn't meet certain circumstantial (need, age, etc,) criteria.

Wealthy investors play the game from a totally different seat. First off, their personal income itself is more attributable to dividends and capital gains (unearned income) instead of wages and salaries (earned income). As such, they pay VASTLY lower income tax rates on that income. Furthermore, they form corporate entities within which they manage their wealth and take advantage of corporate tax benefits unavailable to workers.

Overriding all of this is the CON GAME that's stock ownership. By granting folks an essentially trivial economic interest in 'ownership' they then participate in cheering the slave-driver instead of the slaves ... and play the Greater Fool game of musical stock chairs. (They also stop arguing for employee-owned enterprises - where the WORKERS are the primary beneficiaries of their own productivity.) It's like an economic Food Chain ... and folks that cheerfully join the food chain thinking they're at the top are often shocked when the bigger carnivore eats them.

[2speak]

23. That was helpful information. Thank you.

[nadinbrzezinski]

20. There are penalties to selling those shares

it is called a capital gains tax... the same that actually applies to a 401K if you happen to pull it early

:banghead:

The ignorance is astounding

By the way... you can move, with no penalty, your money from shares to bonds if you so choose

[2speak]

26. Ok thx but are the bonds totally safe like having the money in

your hands. Have there been in history any losses in bonds?

[nadinbrzezinski]

28. Yes, but if that happens it means the GOVERNMENT has defaulted

then that will be the least of your problems

(Though for the record some cities HAVE defaulted... see Orange County California and San Diego City)

You want totally safe... or as close as you can get, talk to a financial advisor...

Ask them about rating and to explain this to you.... I guess slowly and carefully

[NeedleCast]

29. Nothing is totally safe

the bond market is about as close as you can get to it though. Unless the entire government shuts down, bond investments are safe, although they might not be worth anything more than you put into them.

Having money in your hands isn't completely safe either, as someone can come along and clonk you on the dome with a brick and take it away from you. In fact, that's probably more likely than losing money on bonds.

[2speak]

31. Well I wouldn't walk around with it in my fists :-)

[Rabrrrrrr]

33. You also, by just keeping the cash, take the risk of that money losing value.

The longer it just sits not doing anything, the more worthless it becomes, because of inflation.

Think of what a dollar bought in 1910 versus today, and you will understand what that means.

[2speak]

36. I'm confused on this one. What is deflation and isn't that what has

happened to my home value?

[Rabrrrrrr]

42. No, your home has *lost value*. The economy is still undergoing inflation,

which means the prices of staples (in general) are going up: bread, milk, cheese, clothing, cars, and so forth.

[2speak]

45. I thought homes were the problem with the ecconomy

and that they were causing the situation we are in? So isn't the deflation of homes the problem or not? I had heard that lenders who have loans on homes that lost 30% of their value is hurting their books. That they are upside down just like the homeowners.

[NeedleCast]

48. Part of the problem, yes

When you hear people talking about the credit crunch, this is a part of what they're refering to.

Unregulated lending turned out to be very bad. Most people understood this, but not the banks. In an effort to make lots of money fast, they gave out loans to people who's credit was poor. This is a bad idea and anyone who's been through 9th grade econmics understands why. You don't loan money to people who aren't going to be able to pay back the loan (unless you're just being nice, but that's not what banks are doing so it's moot).

Banks loan money under the assumption that they're going to get it back over time, with interest. That's how they make money. They can (in theory) only loan out what money they have though...so if they loan out a whole lot of money and those people they make loans to don't pay them back, the bank takes a loss. That means a lot of thing, but mostly it means that they have less and less money to loan out which makes it harder and harder for anyone to get credit for anything, not just houses but credit cards and other things people borrow money for.

That starts a chain reaction of events. Lots of businesses take short term loans to pay their payroll. If they can't get a loan for payroll money, they can't pay their employees. If those employees aren't getting paid, they can't pay their home loans...and thus the spiral begins.

[nadinbrzezinski]

43. Let me give him a real example, since most people don't have any idea

I was running a role playing game many years ago and had the characters go into a dinner in Seattle circa Summer of 1941

I actually found a menu

A cheeseburger, fries and a coke ran 55 cents

That was the Summer of '41 and that was actually an expensive dinner. You could get the same food at a cheaper place for 20 cents

[2speak]

46. But are we not making more wages now than they were then?

How much money in that ratio would someone have in the bank back then? $500.00. I don't' know anyone that has made out that great in the markets. Example, they put in $100,000 and now have $10,000,000. If anything it has been more like $250,000 roughly around 2.5 times the original amount, more often it's like 1.5 and now most have lost money. In the 2.5 example the $500.00 would be worth $2500.00 I have made more than that in a week. Trying to understand why take the risk.

[NeedleCast]

49. Yes, but again, those wages buy less

The math is pretty simple. If the cost of buying goods and services rises 4% but you only get a 3% raise you can now purchase less things even though you have more money.

[2speak]

51. Sounds like it is imperative that wages keep up with

the cost of goods or this kind of thing will happen.

[nadinbrzezinski]

53. It is happening

Why the Feds have COLA, cost of living.. which is still less than inflation

[NeedleCast]

56. In a healthy market, that's the goal

[nadinbrzezinski]

52. The ratio of income versus expenses was the highest in the 1960s

the height of middle class america

When you compare the cost of living to salaries we have been best case stagnant for the last thirty years, but actually the buying power has gone down

Now what are other factors?

Connect some dots

How strong where the unions in the 1960s?

How strong are the unions today?

What is the savings rate of Muricans today? (-2%)

What is the savings rate in the 1960s (over 10%)

So you have a point

but if you bury the money in the backyard it will loose its ability to buy per the rate of inflation... and in hyperinflation it will be worth the paper it is printed on...

Now if we go into deflation... the problem will be having the cash available. THough things cost the same or less, there is no money in circulation. This is what happened in the Great Depression

[2speak]

54. Are you sure the Great Depression wasn't from people

pulling their money out of banks and the banks then had no money?

[2speak]

57. Maybe we need deflation to pull everything down to the level

that wages are. Then everyone could live comfortably again.

[nadinbrzezinski]

61. Wrong... the deflationary pressures led to people starving

there was bread available, but people didn't have the money for it. Many didn't have work either

[2speak]

67. I did some research on the deflation during the Great Depression

and prices did not fall as a matter of fact they stayed the same for more than 10yrs. Home did fall however.

[nadinbrzezinski]

68. That is what deflation is... when you have a 0% inflation or negative growth

in prices

Wiki is a great place to start

[2speak]

72. I don't consider O% deflation. I have car tires and I know what

deflation is. If they stay at 32psi they are not deflating.

[2speak]

71. This is what I found

Cost of Living 1930
How Much things cost in 1930
The Yearly Inflation Percentage USA ? UK - 2.8%
Average Cost of new house $7,145.00
Average wages per year $1,970.00
Cost of a gallon of Gas 10 cents
Average Cost for house rent $15.00 per month
A loaf of Bread 9 cents
A LB of Hamburger Meat 13 cents
Magic Chef Gas Cooker $195.00
Pontiac Big Six Car $745.00

How Much things cost in 1939
Average Cost of new house $3,800.00
Average wages per year $1,730.00
Cost of a gallon of Gas 10 cents
Average Cost for house rent $28.00 per month
A loaf of Bread 8 cents
A LB of Hamburger Meat 14 cents
Average Price for new car $700.00
Toaster $16.00
Due to increased number of users Electricity prices have been cut by 1/2 in ten years.


I don't see much inflation or deflation during that period. Just deflation on homes.

[2speak]

87. Look at "This is what I found" you are mistaken

[NeedleCast]

58. That was part of it

[nadinbrzezinski]

60. It was far more complex than that. The run on banks was a late event

in fact... a very late event that came well after the depression took hold

The great depression was caused by very similar macro economic events to what is going on right now... such as banks not lending to each other and a severe credit crunch

Sound familiar?

[Ignis]

105. (OT) Okay, now you've piqued my curiosity...

What game? What system? Did the game take place in 1941, or was there some time-travel element involved?

Inquiring (geeky) minds want to know! :)

[Common Sense Party]

64. The thing is, you're investing in bond funds.

Not individual bonds.

And bond funds can go up and down in value with interest rates. When interest rates go down, the value of your bond fund will go up. When interest rates go up, bond funds can go down.

There is risk in everything.

There's risk in having the money in your hands, too--there's inflation risk, there's currency risk, there's robbery risk, there's fire risk, etc.

If you're looking for an investment that is completely free from risk, you will never find one.

[Common Sense Party]

66. No, it's not a capital gains tax that applies to early withdrawal

from a 401(k). Capital gains taxes have nothing to do with 401(k) plans, since it's all taxed as ordinary income.

The extra 10% tax (penalty) for withdrawals from a 401 pre-age 59.5 is an early withdrawal penalty. You'll get hit with that even if you have no gains in your 401(k).

[nadinbrzezinski]

69. You are right, my mistake...

damn I confused them

:-)

Thanks for the correction

[Common Sense Party]

76. No problem. So many moving parts in qualified retirement plans

and in the federal tax code, it's very easy to confuse things--because they make it so damn confusing.

[Ms. Toad]

70. There is an additional penalty with the 401k

If you take money out of the 401K, in most circumstances you pay a early withdrawal penalty of 10% (on top of the capital gains tax).

Neither the penalty nor capital gains tax apply if you are moving it within the 401k plan.

[Common Sense Party]

78. There's no capital gains tax in a 401(k).

It's ALWAYS taxed as ordinary income upon withdrawal. Which can be higher than the capital gains tax.

[Ms. Toad]

90. Good point.

So 10% plus the potentially higher tax because it is ordinary income.

[Common Sense Party]

92. Yup. And that's just federal. You may have to pay state income

taxes as well.

[Ms. Toad]

99. I hope that goes without saying.

But ya never know...

[NeedleCast]

27. 401k money is untaxed, which is where the penalty for withdrawl gets involved

A 401k is a retirement fund. It is, generaly speaking, NOT a way to make quick money that you want to use in the near future. Most employers will also match a percentage of their employees' funding of their 401k.

So lets say you make 50K a year and want to put 10% into your 401k. Basically, you're putting 5,000 dollars a year into your retirement account, split up on a per check basis (so if you get paid bi-weekly we're talking 5,000/26 per pay period). That money goes into the retirement account PRE-tax, so whatever you're putting into you're retirement fund is not subject to income/federal/state taxation as long as you leave it alone. The company might also match an amount...so lets say you're putting in 10% of 50K and your employer matches 5%, you're essentially getting an extra 2,500 dollars a year in un-taxed money going into your retirement account.

The caveat here is that you can't touch that money until you're at retirement age without paying a fairly massive penalty. If you take money out of your 401K, it'll be subject to taxation at the time of withdrawl...so basicaly you're going to lose 30% of it, and the 401k holder will probably assess a fee as well. Basically, if you pull money out of a 401K pre-retirement, expect to lose 40% of it to taxes and fees. This is, usually, good. It strongly discourages people from screwing with their retirment fund.

The "wealthy investor" (although you don't have to be wealthy to invest in the market) is buying and selling equities of some sort. This is not a retirment account. These investments are made with money that person already has (money that has, presumbaly, been taxed). If that person MAKES money with their investment, that IS taxable income. Again, basically, if you make money off a stock investment, the income you make from it is taxable.

So you're really comparing apples and oranges here. A 401k is a retirment account and is not like a standard investment in the market.

[2speak]

30. If you withdraw why not just tax the amount then with no penalty?

Does the government somehow benefit from the money being in the market?

[Rabrrrrrr]

32. That tax is the penalty.

Though as the other poster said, the 401(k) holding/managing company may assess a fee (or penalty, if you want to call it that) for the early withdrawal, but that won't be a large amount at all, some minor percentage of the withdrawal, or a flat rate of $35 or $50 or something.

[2speak]

34. The penalty is exactly the tax you would have paid

anyway on the money you withdraw, is that correct?

[Rabrrrrrr]

39. No.

Think man, think.

Whenever you take it out (even post retirement) it gets taxed at whatever tax rate you are at at the time. The beauty of the 401(k) is that it goes under the assumption that at retirement age, one's expenses are lower (house is paid for, for example; one eats less, perhaps, and so on), and thus one is at a lower tax rate than when one was working; and thus, all that money that got socked away is getting at a lower tax rate then when you earned it.

But, if you take early withdrawal, it gets lumped onto whatever else you earned that year, and you pay tax on it at whatever level that income demands.

More than likely, if you take early withdrawal while you are still working, you will pay a higher tax rate on it than if you let it ride.

By taking it out early, you also lose all the potential earnings it could have made.

[2speak]

41. I am a man treat me as such.

[Rabrrrrrr]

44. Okay, I edited it.

Sorry!

[NeedleCast]

40. Yes, pretty much

If you pull money out of a 401k early, you basically have to pay all the taxes that WOULD have been assesed on that money just as you would on the rest of your income (and, probably, a penalty from the 401k holder). Plus you'll probably be pushed into a higher tax bracket if you take out a large chunk of money.

Basically, whatever you pull out ceases to become tax-free money and becomes "income" which is then taxed at whatever your tax rate would be if you made your normal income/salary PLUS whatever you pulled out.

Edit to add: Even though we had different answers, the poster above me and I are pretty much saying the same thing. Sorry for the apparent conflict of answers.

[Ms. Toad]

74. Not correct.

To discourage people from withdrawing money from retirement accounts, the government has imposed a penalty of 10% - in addition to the taxes owed.

[2speak]

77. So why does the government do this? Are they in cahoots

somehow with the market? They would only do this if they somehow benefited from your investment being in the market correct?

[Common Sense Party]

81. They do this because they want Americans to save for their own retirement.

Company pension (defined benefit) plans are going the way of the dinosaur and Social Security provides a small pittance. The gov't wants us to save for retirement. So they've given us the 401(k) plan which has two huge benefits:

1) Payroll deduction--it's simple and easy to invest when it automatically comes out of your check.

2) Tax deferral--you don't pay taxes on any of your 401k contributions, or on your earnings, until you withdraw them, hopefully at retirement.

Since they want us to have money when we are retired--so we won't be a huge burden on society--the gov't has established penalties for withdrawing the money BEFORE retirement age (age 59.5).

"In cahoots with the market"? That's nonsense. The government doesn't care what you invest in within your 401(k). You could put it all in a cash money market fund or a guaranteed fixed account. You could put it all in a foreign stock fund.

[2speak]

85. So I can invest in Joes supermaket if I want but the only

requirement is that Joes supermarket has to be public and listed on the Stock Market. I can't just invest my money in his business on my own and have it tax deferred. Does our government get loans from foreign investors? Sure sounds to me like I am being herded in a direction mandated by the government.

[Common Sense Party]

88. I'm not sure what your point is.

Can you go invest in Joe's Supermarket if it's not on the stock exchange? Of course you can, if Joe lets you. You can loan him money, you can buy part ownership in the business. Is it tax-deferred? It could be--speak to your accountant about that. There are obviously ways to do that.

Does our government get loans from foreign investors? Yes, every day. What does that have to do with the price of cheese?

You don't have to invest in your 401 if you don't want to. No one is making you do anything. 401 plans are there for our convenience. I happen to think they're a fantastic way to save for retirement. your mileage may vary.

[2speak]

91. What I am saying is I am unable to have money go

directly to joes supermarket from my paycheck and not pay any taxes on it. I am forced to invest in big corporations for the tax deferment.

[Common Sense Party]

94. Fairly big, yes. Your plan should have a small-cap fund, which

invests in smaller corporations, usually under $1B in market capitalization. Inside the 401k, you're most likely going to have mutual funds, which invest in many company stocks. Why? Because it's not as messy for the plan administrator.

But you can invest through an IRA and get tax deferral as well. If you're self-employed, you can set up your own 401 plan and invest in whatever the heck you want.

[2speak]

96. I am aware of that, but why can't I get the deferment

and invest in joes supermarket directly?

[Common Sense Party]

100. Through your IRA, you may be able to. Talk to your CPA.

You seem to not want to accept any of the thoughtful answers that are being provided. You already have THE answer in your mind, and you refuse to see any other point of view. That's obtuse, and more than a little rude. I have answered your questions and I refuse to go around and around on this issue.

Good day.

[NeedleCast]

104. Because it's a logistic impossiblity for one thing

Imagine that you are a company like Principal Financial or TIAA-CREFF and a division of your company deals with retirmetn accounts.

I have no idea how many people in the US and abroad have 401k's with Principal but it's safe to say that it's 100's of thousands. How many people would Principal have to employ if they had to do each retirment account individually? With a retirment account, you do have a pretty wide level of choice in what you're going to invest in, you just don't get to totally micro-manage the account.

[NeedleCast]

102. No

If Joe's supermarket is a publicaly traded company, you can use your money to buy stock in it (but probably not through payroll deduction, unless you happen to work for Joe's supermarket).

When you put money into an equity fund in a 401k you're basically buying a big package of stocks which might or might not include Joe's supermarket. I'll use my CREF account as an example.

The choices I have are four types of equity (stock) accounts ranging from pretty safe to fairly risky. Each of these "funds" include a package of stocks that the account manager (CREF) picks.

I also have investment choices like real estate, fixed-income (These are bond accounts that buy an assortment of very stable bonds), a money market account, etc.

Many of the equity funds include a number of "big corporations" down to smaller, over-seas companies. Just depends on the fund.

[Ms. Toad]

98. Investement in stocks is not generally tax deferred.

If Joe's supermarket is public and listed on the Stock Market - AND it happens to be an investment vehicle in your 401k plan - THEN you could invest in it in a tax deferred manner.

Otherwise you can invest in it on the stock market (assuming it is listed there) using after tax dollars.

If it is not listed on the stock market, there are various vehicles that Joe's Supermarket could set up, each of which has their own tax structure. Generally, these will be after tax dollars.

BUT - you can also invest in guaranteed funds (CDs for example) in a retirement account and get the tax benefit. The tax benefits and penalties for retirement accounts has NOTHING to do with where the money is invested - it has to do with encouraging you to put money somewhere and leave it alone until you retire.

It's your choice - you can invest in restricted accounts for retirement (and agree to accept both the penalties and benefits) - or you can invest in unrestricted accounts (and forfeit the benefits and avoid the penalties)

[Common Sense Party]

103. Well, you can defer taxes on your capital gains.

Even if you buy the stock with after-tax dollars, not in any kind of retirement plan. If I buy $1000 of stock in Joe's Grocery when Joe is just getting started, and I hold on to it for 10 years, I don't pay taxes on the stock until I sell it. If Joe pays no dividends during the 10 years, I don't have to pay taxes on my dividend income.

Let's say, after 10 years, I sell my shares and they're now worth $20,000. I'll have to pay capital gains tax on my $19,000 gain.

But that only works with individual stocks.

[Ms. Toad]

106. Sorry- I wasn't clear.

I was referring to the deferral of income taxes on the initial investment - which is what the OP seemed to be focusing on in this question.

You can also pick mutual funds which focus on growth, rather than income. I haven't done the research to know if any are 100% non-dividend funds - but there are certainly some which spin off very few dividends so the change in value primarily ends up as capital gains (or losses). You still invest with after-tax dollars, but you have little to no income until you sell the shares.

[Hannah Bell]

113. yes, you were.

[Ms. Toad]

84. You get a tax benefit up front

in exchange for accepting restrictions on access to your money. The tax benefit is supposed to be enough of an incentive to get you to save for retirement. Because the government forfeits taxes now (you don't pay taxes on money going into a retirement account), it has to get something in return. What it gets is more assurance that you will have money for retirement and that it will not have to support you through entitlement programs. It gets this assurance by actively discouraging you from taking it out until retirement (the 10% penalty on top of whatever taxes are owed).

You get the tax benefit (and penalty for early withdrawal) even if your retirement money is in interest bearing, guaranteed accounts (CDs for example), rather than the market. The tax treatment is the same.

[NeedleCast]

95. Thanks for the correction

I wasn't aware that it was government imposed.

[Ms. Toad]

73. No.

Until you reach a certain age, or have other qualifying factors, you pay an additional 10% penalty to the IRS for early withdrawal. (The 401k plan may also assess a small penalty.) This is on top of any taxes you would owe. Trust me - I have done taxes for far too many people who got into a financial bind, took money out of a retirement plan, then got hit with an unexpected penalty at tax time.

[2speak]

75. So the taxes and penalty are much more than you would have

paid tax on the money originally?

[Ms. Toad]

80. It depends

If you am in a 30% bracket when I put my money into the retirement account, you got to put every penny of every dollar (since plans are pre-tax). If you had not put it into a 401k plan, you only get to spend (or invest in a savings vehicle) $.70 out of every dollar.

If you am taking the money out because you have no income, and take out a small enough amount of money you may be in a 0% effective tax bracket - and then you only have to pay the 10% penalty. You could be better off in this scenario (assuming you didn't lose money on your initial investment).

On the other hand, if you have income, whatever you pull out will be taxed at the highest tax rate you pay (we are all taxed at multiple tax rates - the first money earned is taxed at 0%, the next chunk at a higher rate, and so on until you reach the maximum tax rate). And you will pat the 10% penalty on top of the tax. (in this case, you're probably right).

It's pretty complicated - if you aren't at least passingly familiar with the tax code, good with arithmetic, and have good records about income and taxes from the investment years you probably want to consult someone to figure it out.

[2speak]

83. I still don't understand why I have to pay a 10% penalty

to use my money before I quit working. Isn't that an extra tax.

[Ms. Toad]

89. It is to discourage you from treating your retirement account

They encourage you to save for retirement by giving you a tax benefit.

They discourage you from robbing your retirement by penalizing early withdrawal.

It's to encourage you to save for retirement. You're not required to take advantage of the availability of retirement plans. You can save your money outside of a retirement plan and have it whenever you want to. BUT - but if you do choose to take advantage of the tax benefits by putting money into a plan, you are also choosing to pay the penalty if you can't stick with the plan.

[2speak]

93. And if someone wants to or has to retire today how are they

going to come out ahead?

[Ms. Toad]

101. When you signed up for the plan,

you agreed to the restrictions. There were age limits (which have not changed since at least the early 80s), and some exceptions for other qualifying conditions which you agreed to when you took the tax benefit.

[NeedleCast]

38. That question has a VERY long answer

The short answer is yes, assuming you make money...because then they get to tax it.

The gist of the situation here is that when you put money into a 401k, it goes in without being taxed. They government benefits in you having a retirment fund to some extent, because then there is less risk they will have to give you money for some reason. The 401k fund holder will assess a fee because they have to do work if you start pulling money out of your 401k (that's part of it anyway...the other part is they just want to make money, which is what businesses do).

In the long term, the benefit to the government is more of the government trying to off-set future cost...that cost being you being a senior citizen without a source of income and them having to give you money. Someone can correct me if I'm wrong on this (which is possible). I don't know if the government gains any additional benefit simply from the money being in play.

[2speak]

82. Then why would they penalize you 10% to use your own money?

Isn't that another way to tax you?

[NeedleCast]

107. It's explained several times in this thread

The penalty for early withdrawl is to keep people from using their retirment savings as a standard savings account.

[Common Sense Party]

109. I guess he doesn't like the answers, because he keeps repeating

the same questions, over and over and over.

[NeedleCast]

111. Hehe, I'm not even sure what the question is

or what spawned this thread. Seems like OP is trying to link a retirment fund with government greed? I dunno.

[Common Sense Party]

112. Me, either. I wish he'd come right out and say what's on his mind.

Enough beating around the bush. So to speak.

[Rabrrrrrr]

116. I think he's just a pot-stirring ass, trying to "educate" us fucking dumb people ala Socrates

I don't think any of the ass's questions are legitimate ones - I think they're all leading questions that he thinks are really quite clever, waiting to "prove" to us how fucking dumb we are with whatever asinine completely ludicrous asshole theory he has, by slowly "steering" us to whatever "truth" his heinously non-functioning brain has devised.


These jackasses show up occasionally here at DU, starting off what seems like a legitimate question but quickly becomes apparent the poster is just a time-wasting sack of shit who think this is all either funny, or that he/she is, somehow, enlightening the non-conspiracy-addled literate people who actually use their brains for thought.

[Common Sense Party]

117. You may be right. Spot on.

I get tired of answering questions for fools who don't really care about the real answers.

[PM Martin]

59. That sounds about right.

The US has been taken over by the corporation. This is not to say that we Canadians have
had our share of battles with the corporate powers, but things have gotten out of hand for our neighbors
.

[Johnny Potpie]

79. Good.

This is why I'm glad Socialism is coming. What you describe is not fairness. It's maddening that these people are immune from risk in the market. :grr: It pisses me off too. We NEED a system that forces these pigs to share, rather than horde their wealth. I'm hopeful Obama will help move us closer to the ideals of fairness for all.

[OPERATIONMINDCRIME]

108. It Makes Sense.

401k's are paid for with pre-tax dollars. Investments aren't.

[nini]

115. you will be taxed on the money when you take it out because you didn't before you put it int there

You always don't have to invest in stocks either. I switched my money to a traditional retirement savings after the 2004 election because I figured this would happen after 4 more years of W. I've actually made a bit of money the last couple weeks.

I'm really glad I did that now because I remember losing after 9/11 - I don't have the stomach for all this crap.

:-(