Two things you must know about debt crisis damaging 401K’s: Independent Financial Advice
Posted by Don Martin on Fri, Jul 22, 2011 @ 08:51 AM
Debt crisis affect on 401K’s
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People wonder how to protect their 401K from the Treasury debt crisis. For some people this is their only retirement nest egg other than Social Security. And Social Security needs a 23% reduction in benefits to remain solvent.
Point I: Exotic Strategies to protect 401K’s:
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Exotic Strategies to protect 401K’s:
1. Ask your employer for a brokerage window
2. Ask your employer for an “in-service” withdrawal rollover to an IRA
3. Borrow from your 401K and invest the proceeds as you wish
4. In a non-retirement account use derivatives contracts to invest in desired assets in the amount that is in your 401K and keep the 401K invested in a Money Market or Treasury Bill fund.
Strategies 3 and 4 are risky and could tempt people to engage in dangerous gambles so they should be avoided by most people. The derivatives investment could backfire, producing ruinous losses.
Unlock your 401K or stick with its resources?
Point II: The safest 401K strategy may also be the simplest
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Consider using a 401K as a place to own high quality corporate bonds and Emerging Market bonds rather than stocks because for tax purposes Treasuries are best owned in a retirement account if you live in a high tax state. (Because Treasuries are free of state income tax they should not be in a retirement account because their income will not be free of state income tax when withdrawn from a retirement account, but it is free of state tax in a regular non-retirement account). Most 401K’s have a few reasonable (but not that great) choices of domestic bond funds, but no access to Emerging Market bonds.
What will happen if the Treasuury defaults? The only precedent to a Treasury default would be analogous to the Lehman bankruptcy. The market crashed but quality domestic short term bond funds only declined by a modest amount and then fully recovered in a few months. Of course a Treasury default would be systemic, but then the Federal Reserve would start QE3 by buying Treasuries with a flood (of money) of Biblical proportions.
I wrote a blog post “Are your funds trapped in a 401K?” and “Treasury debt crisis 401K investing”.
Investors should seek independent financial advice. Consider these ideas for assets not held in a 401K:
