The 401k fallacy …

The objective of this blog is not to challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’ …

… that’s just a means to an end.

The objective is to help you become rich [AJC: after all the title of this blog IS “How to make $7 Million in 7 Years”], but in doing so we MUST challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’!

Do you see how one is the means and the other is the end?

So it is with many of these personal finance ‘myths’ … so many are treated as an end in themselves, rather than the means that they simply are; none more so than the Mighty 401k.

If we are to become rich, we must slay the temptation to lay at the feet of this great Financial Idol and see it not for what it promises (future financial freedom) but for what it really is: simply words written on a piece of paper.

That’s it, the 401k is just a tax-advantaged savings TOOL … it’s not even a scheme, as there is NO guidance as to what you should put in it (other than restrictions to tell you what you MUST NOT put in it).

Therefore, I have NO OPINION on whether a 401k is intrinsically good or bad for YOU … just as I have no opinion as to whether a stone carving is intrinsically good or bad for a pagan civilization … it’s what belief in its purported ‘power’ does for (or against) your [financial] future that concerns me.

It’s not the tool, but how you choose to use it that counts …

Now, I covered the 401k in many posts, but I thought that I would pick up on a great discussion going on over at my other site, where Scott says that he has no use for a 401k:

I can’t utilize many of the retirement accounts because of my income level and the ones that I can, I max so quickly that it just seems moot. For example, right now, I’m saving up cash as fast as I can to purchase the entire building that my practice is located in. This building also has another business next door that will be paying me rent, and in essence, will drop my personal mortgage significantly, while it’s getting paid off in a few short years, then I own the commercial building, not pay rent, AND receive passive income!

So my question to you would be; Should I delay the purchase date to buy this building and all the above said benefits to first max out retirement accounts that I can’t touch for 30+ years, AND get taxed on them when I do.

Which gets me to my Number faster? Purchasing commercial real estate NOW as fast as I can in my 30’s, particularly one’s that I would normally have to pay rent on and actually begin RECEIVING rent on as well, or fund a retirement account to shed some tax now?

After a bit of discussion around the possibility of finding other tax-advantaged investment vehicles, depending upon your financial positions, Jeff summarized the discussion quite soundly:

The only reasons I can come up with right now to not invest in these types of accounts first is either:

1. The amount you want to invest is greater than the annual contribution limits.


2. You don’t like the age restrictions and early withdrawal penalties that go along with these accounts.

Those are both very valid concerns and certainly reasons to not use typical retirement accounts.

Absolutely, Jeff!

If you can achieve your investment goals, at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so.

However, if you divert from a financial course that stands a reasonable chance of meeting your financial objectives – the type of course that Scott seems set to take – just so that you can take part in, say, an employer-sponsored 401k, that may not achieve your financial objectives (in the timeframe that you require, not the timeframe that the employer/government offers) then, in my opinion, you are making a huge mistake 🙂

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4 thoughts on “The 401k fallacy …

  1. If you can achieve your investment goals, at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so

    Agree, 401k is the best way I can shelter tax

    Once you are a millionaire, I see why a person like yourself Adrian have no need for it

  2. @ MoneyMonk – aaah, but did I BECOME a millionaire then forget about the 401k? Or, did I focus on becoming a millionaire, therefore found better things to do with my money than ‘park it’ in a 401k?

    See, I would just prioritize your own words a little:

    “If you can: 1. achieve your investment goals, THEN 2. at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so …”

    and I would add:

    “… but, if you could choose ONLY 1. OR 2., you would equally be a fool to choose 2. over 1.”

  3. Yeah Adrian, I think that’s the big point that many people are somehow still missing. The point is that you did not BECOME a multimillionaire by putting money in your retirement accounts. You BECAME a multimillionaire by focusing on building successful businesses(which required you to put all your available cash into developing those business, not stacking it away in 401k’s, Roth IRA’s etc..), as well as buying stocks and real estate.

    I think many folks keep forgetting that the purpose here is to learn how to make 7 million in 7 years, not 2 million in 40 years and then get taxed on it anyhow when you withdraw it at ‘government declared’ retirement age.

    As far as using retirement accounts to shelter tax,just to help the readers understand a little better, after my wife and I did our taxes at the beginning of the year, we realized that after all business deductions, real estate depreciation deductions and rental mortgage interest deductions, we only paid around 25% tax for the year on our income, which is substantial. This was about 10% LESS in taxes than we paid the previous year when we didn’t own such investments. Needless to say, that 10% savings over last year equals approximately the savings we would have made by putting money into a retirement account, but instead, we now have multiple business ownership and extra real estate. This was simply from our first year of dipping our foot into investing and being part of the 7 millionaires in training.

    And this is only the beginning. I wonder how much less in tax we’ll pay next year by buying up appreciating assets and/or small business ventures?

  4. Pingback: Building a better retirement account … « How to Make 7 Million in 7 Years™

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