While I think it's a scam, I don't ever stop any clients from investing their money into whatever medium they prefer. I legally can't advise them not to.
I'm only asking your opinion on what's the alternative for young working people who have no access to a pension but have access to a 401K, since you expressed your opinion that 401Ks are a scam. I'm not asking what you can or can't legally advice your clients.
You can. If you leave your job, you can certainly roll over your traditional 401K into a Roth IRA.
I should have added that you can't rollover a traditional 401K to a Roth IRA without triggering a taxable event. You will owe income taxes on all of the money you rollover in the year when you roll it over. The total amount transferred will be taxed at your ordinary income tax rate, like your salary. This is something few young working people are prepared for.
I know you already know all this stuff, and one doesn't have to be an accountant to know this stuff. I'm simply adding it to make a point and for the benefit of others reading this thread.
However, I wasn't asking your opinion on what young working people should do about their retirement plan when they leave their job. I was asking your opinion on what's their alternative if they have access to a 401K and no access to a pension while they are at their job, not when they leave.
That's known.
Again, I know you know. The point is one of the advantages of a 401K plan (traditional or Roth) over a personal Roth IRA is that with the 401K plan one can contribute far more because of the much higher contribution limit. The advantage of a traditional 401K over a Roth 401K and Roth IRA is that by contributing pretax money you have more money to contribute now with a longer timeframe for those higher contributions to grow.
General rule of thumb is for young people at lower tax brackets to contribute after tax money to a Roth 401K and/or a personal Roth IRA. As they grow their career and get into higher tax brackets, they can switch to contributing pretax money to a traditional 401K. Once they max out their 401K, they can start maxing out a personal Roth IRA too as their wages grow and they have money left to invest and max out both.
As their wages grow further and they have money left to invest after maxing out both their 401K and a personal Roth IRA, they can start contributing after tax money to a taxable brokerage account.
I'm leaning more towards utilization of a backdoor Roth IRA for better protection of your assets from taxes. Roll over 401K after leaving job into traditional IRA and then backdoor it into Roth IRA.
Many retirees already convert their traditional 401K and IRA to a Roth IRA in chunks overtime, between the day they retire and age 72 before Required Minimum Distributions kick in. Since they are retired already, they pay less taxes when converting than whey would have while still working.
Other retirees spend down their deferred tax retirement accounts first, before age 72 and before tapping into their Roth and taxable accounts.
Why not do a self-directed IRA and use it to both invest in the market and also into real estate? Get benefits at the tail end and dodge a world of taxes if done right. Not to mention that the self-directed IRA becomes more like a one-stop shop whereby you get the flexibility in terms of the various types of investments (stocks, real estate etc) you’re able to hold in the account.
Again, the contribution limit for a self-directed IRA, traditional IRA, and Roth IRA is only $6,000 per year. Self-directed IRAs have more complex rules than traditional and Roth IRAs.
Your advice is very good in my opinion, but only for a select few. It's a heck of a lot simpler to invest in an already available 401K plan and a personal Roth IRA, but the vast majority of people aren't interested in learning very basic investing principals to use their 401K plan to their advance. That being the case, I don't expect them to do well with much more complex and far less passive self-directed IRAs and real estate investing.
I believe 401Ks are a scam as compared to what true pensions were able to offer.
401Ks and their tax deferrals sting come retirement. You retire and get taxed pretty harshly on distributions. If taxes are indeed lower, you can get ahead, but it certainly doesn't play out that way for most. The match is a tax benefit for your employer and even then you don't get to taste it until you're vested.
Do you have any data showing that it certainly doesn't play out that way for most? That hasn't been the experience of retirees I know.
Why should anyone care that their 401K match is a tax benefit for their employer? All they should care about is that they are getting thousands of dollars free from their employer. If they don't participate in their 401K plan, they get nothing.
As for employer match vesting, it's the same with pension benefits.
The fees alone will eat away at close to 50% of what you accumulate/save over time.
Do you have any data that shows this? I pay no fees for my 401K plan. Maybe my employer does, but I don't. I pay only the expense ratio of the index funds I invest in which are 0.07% and 0.32%. That's only $0.70 per $1,000 invested and $3.20 per $1,000 invested.
While the assumption is that much like index funds you can get a good return averaging 6-8% per year, reality is that if you're the lucky one to retire when the market has fucked itself over, there goes a large chunk of your money to retire properly and make ends meet.
Fear of Sequence of Return Risk is not an acceptable reason to keep one from investing for the future. There are simple ways to deal with it and many have dealt with it and are fine in retirement. As I said, all it takes is learning some basic principles and applying them.
NOW, something is better than nothing. If you say "I don't want to invest my money in anything else but what my employer offers me", then I don't think it's a bad idea especially if you receive a hybrid whereby your employer offers something else that resembles a pension.
I'd say Nothing is better than investing or participating in a scam. Again, I'd never invest or participate in something I'd believed to be a scam, and I wouldn't advice anyone to do so either.
With the 401K, you lower your yearly tax burden and if you retire at a good time, you can get decent distributions.
So it's not a scam after all, is it?
I am not a financial advisor. I am an accountant. It is illegal for me to advise my clients as to what to do with their money. I cannot provide investment advice or tell a client where to spend their money, I'd lose my license by doing so.
I know that. This is a bodybuilding forum on the Interwebs. You and I are anonymous. You are not my accountant and I am not your client. I'm not asking you to give anyone any financial advice.
Since you expressed your opinion that 401K plans are a scam, I was curious about your opinion as to what would be the alternative for those with access to a 401K plan and no access to a pension.
The reason I care about your opinion is because you are an experienced accountant.
