Saturday, April 21, 2012

Money – Why I hate IRA and 529 plans

There is never enough shortage of bad advice in the financial world.  I was talking to John the other today as we discussed finance over our lunch walk.  Nothing better than exercise to get your creative and mental juices flowing, and I haven’t met a more reasonable critic than my friend John.  I recently read a blog giving financial advice to an older gentleman who said he would like to buy life insurance as a way to give money to his kids and grand kids when he eventually passed away. The advice was to rather get minimum life insurance and put money into a 529 plan.


Now, I do not know everything about this person such as age, career, life habits, cost of life insurance, but I do know that IRAs and 529 plans from my experience are terrible plans for most people.  There is a big difference between expected returns and actual returns, you'll need to understand that the two are very different (expected returns say things like...past performance doesn't guarantee future results).  

Life insurance has a guarantee associated with it.  529 plans do not have such as guarantee.  With life insurance, as long as you continue to make those monthly or yearly payments, you will get whatever amount the insurance company calculated as your life benefit.  If you recall from my life insurance article...you might understand that the return on investment depends on how quickly you meet your maker.  Therefore the return on investment is unknown, but as long as you pay, you'll get something in the end (as long as the insurance company doesn't go bankrupt).


When I worked at Fidelity Investments as a stockbroker the majority of my phone calls were people needing to withdraw money out of their account. Which account?  My IRA they said in great disappointment.  The purpose of all IRA accounts is for retirement.  However, the people I spoke with were destroying what they had saved.  Worse part was that many of them were Traditional IRAs (probably rollovers from 401k).  This means means tax, additional tax, and more than likely they lost money in the stock market on top of it. 


This is what I call the quadruple whammy of finance.  A bad event causing withdraw, tax, more tax, and lost money to boot.  Oh, and if you decide to close your IRA...wham!  Another $50 or more sucked away just to close out the account.  My heart goes out to them, I feel your pain.  Didn't know about this?  Probably not...typically people don't go into a broker and ask, if I open up an IRA and want to close the account how much does it cost?  Or, if I lose money in the account...what happens?


One of my favorite game shows while growing up was Press your luck. Getting a whammy meant you lost everything…and there was a 1 in 6 chance of getting a whammy.  If you received four whammy and then you were out of the game permanently.


Getting a quadruple whammy for your retirement means you are finished (or at least feel finished), and that was the sound of their voices day, after day.   I would never want anyone to experience the horrible situations they experienced.   So, here I am talking to someone who not only has something horrible happen to them, but now they have to withdraw money out of their retirement account.


Most of these financial "experts" always push people to these areas.  529 plans is a must because everyone has to go to college.  Why?  To get the ultimate desk job?  I know of some people who have these desk jobs that are bored out of their minds.  As for me...I've been a Chairborne Ranger ever since I got out of AIT...and I love it!


So, why do I dislike IRA and 529 plans so much?  Well, no one talks about the ramifications of creating an IRA or 529 from a risk perspective.  Never is the downside risk spoken about, because this money is for retirement and would never be used in an emergency.  Being sarcastic…it happened all the time.  What if you put money in a Roth IRA it loses money and you decide to pull the money out?  You lose twice.  You lose financially from your economic loss.  Plus you lose from a tax perspective.  Had you invested the money in a taxable brokerage account, you could have written off the loss on your taxes.


This is true with 529 plans, 401k, and both Traditional and Roth IRA.  Granted you might have received a tax benefit from putting money into a 401k or Traditional IRA.  But the fact remains you cannot write off losses occurred.  The tax bracket you were in could be greater than when you first put the money in.  If you lose money in a taxable or brokerage account Uncle Sam in this situation says…I feel your pain and cuts you a break.  Otherwise your rich Uncle will say…hey you tried to cheat me out of paying taxes, you got what you deserved.

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