I guess the title of this post could be a bit controversial. After all, even I contribute 1% of my income to my company sponsored 401k plan. But still, I’m on the side that thinks that 401k plans for the most part are total bullshit. I love the idea of pretax savings as much as the next guy but for most of us these plans offer very few options to really grow your nest egg.
Before I got any further: I AM NOT A FINANCIAL ADVISOR. I AM NOT YOUR FINANCIAL ADVISOR. Seek a qualified professional and understand what is suitable for your risk tolerance before making any investment decisions.
I’m currently studying for my Series 65 Investment Advisor exam. I do pretty well in the market for myself in my trading and investment accounts thanks to mentors like Phil,, Patty, and AJ. Quite frankly, I think I can do pretty damn good for my clients too. As such, I spend a lot of my time analyzing when to enter and exit positions. Currently EVERY SINGLE FUND offered in my 401k plan says EXIT. Meaning I’m stuck in cash until something changes. Who knows how long that will take. We aren’t even taking into account how ridiculously expensive mutual funds are to the investor. You have to keep paying those active fund managers even if they are losing your money. It’s a rip off! Especially since so few of them ever beat the market. You could likely do better just buying into a low cost S&P 500 ETF… except that it is probably not offered in your 401k plan…
Before I get going down that rabbit hole, let me just explain what I’m doing. If it makes sense to you great, maybe there’s something in here that you can replicate for yourself. I have debt. Not a crazy amount but debt none the less. And it’s the worst kind… Credit Card Debt… (enter horror movies soundtrack of your choice.) On average this is costing me about 12%/year. My 401k, sitting in cash, isn’t making me anything. In its best year I believe it did 13% after fees. I used a small loan out of my 401k a few years ago to buy a condo. The interest rate is about 3% but I’m paying it to myself. I owe about $23,000. I’ve been earning an average of about 4% returns per month in my trading account. So to summarize
- Debt – 12% (expense)
- 401k Loan – 3% (expense but paying it to myself)
- Investment/Trading Accounts – averaging 3-4% returns per month (income)
So here’s my plan. I feel like I need a John Madden whiteboard to draw this out:
- I’m going to take money from my investment account to payoff my 401k loan.
- Now I can take a new loan against it. I’m allowed the lesser of $50k or 50% of the account value. This will once again be a loan at 3% paying myself back over 5 years. Steps 1&2 are a wash. [Update: Evidently the IRS has a rule in place that will make me wait 12 months after the loan is paid off. #StupidRules]
- With that money I will eliminate the debt at 12%. Eliminating a monthly expense.
- The remaining balance will replenish my investment account. Income stays the same so it’s a wash.
The net result of this will be a positive cash flow of about $1,000/month and all I’ve really done is just move money around!!
$1,000 a Month!! – That’s rent. That’s a boat. That’s fly out and see my lady money…
- Instead of paying interest to credit card companies, I’m paying interest to myself.
- $1,000 a month positive cashflow
- Not letting money sit idle in a 401k
- What if I continued to rack up credit card debt? Which I don’t.
- What about the opportunity cost of lost time in my 401k account? That’s sitting in cash… so nope. Even if the market shoots up, I’ll still have funds in my investment account outpacing what I can get in my 401k.
Now let’s say 5 years have passed and the loan is repaid. What will I do then? Most likely, I’ll take out another loan for the maximum amount I can and just add it to my personal investment accounts. My returns BLOW AWAY what I can do inside my 401k. I’ll just keep doing this until $50k isn’t enough money to make a difference. It’s not worth the penalty of withdrawing all of the funds. Uncle Sam would then get more than his fair share and he get’s enough already…
I’ll likely continue this strategy until I am allowed to move my employer sponsored 401k into a full featured 401k where I can choose any investment I want. Unfortunately, this can’t happen until I leave my current position, and I really love my job.
I would love to hear your opinions on this strategy. You can post below or email me anytime at Jason@JasonStuber.com
The Stuber Group, LLC and/or Jason Stuber provides strategies and education designed to inform and teach you about investing and how our strategies, when applied properly have the potential to limit downside risk and create investment profits. There is no assurance, however, that you will be a profitable investor based upon what you learn from Jason Stuber and/or The Stuber Group, LLC. All trading and investment activity subjects you to the risk of loss, including losses greater than your original investment. This means that you should not invest with money that you cannot afford to lose. The Stuber Group, LLC and its personnel are not registered broker-dealers or investment advisors. You are encouraged to speak with licensed broker-dealers, investment advisors, and other consolers of your choice regarding the appropriateness and suitability of trading stock, options, or making any other particular type of investment.