Contrarian money management

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sjdavis's picture
sjdavis
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Contrarian money management

Hello all... I want to posit a scenario and get some thoughts from the many people on here with smart financial sense.<!--break-->

   Conventional wisdom says to steadily invest in a 401k and if possible, put extra into an ira.  I have done that for years but am starting to question conventional wisdom.  All that money is in traditional investment banks and represents paper and promises to redeem.  Anybody familiar with the CC knows that might someday be a problem.

  Now, what I currently do not have is a good allocation of gold/silver.  I've had a bit of SLV, but am aware of the issues that that paper promise presents in a SHTF scenario.

  So here's the scenario/question.  Is it a good or crazy bad idea to move some 401k or roth ira money into a couple different places, such as something more liquid and some things directly tangible?  Convention says it's crazy to take money out of a retirement account because you pay the taxes and then a 10% penalty.  I get that.  But there are a couple forces making me question convention.  

  First, I think it is likely that decades down the road when I would be withdrawing funds from those accounts that taxes are going to be much higher than they are today.  At least if we continue to spend, then we have to either borrow more, the philosophy that put us in this mess, or raise revenue, through increasing taxes.

  Second, the 10% penalty could, in hindsight, look like a deal when compared to gold/silver in a hyper-inflationary environment.

  So my thoughts are that when I look at it conservatively, taxes are a wash.  I have to pay them now or later and can just assume they'll be the same.  So it's the 10% penalty that is the question.  To be stuck in a bank without a physical gold/silver hedge just to avoid a penalty would be a bitter pill if/when the economic reality is common knowledge.

  Thus I am starting to feel more comfortable with breaking conventional wisdom and moving some - not all - retirement funds into tangibles.

  My question is what holes this non-conventional community can poke in my logic?  Is it a good or just a crazy bad idea.

Thanks.

 

Stu 

MarkM's picture
MarkM
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Re: Contrarian money management

Stu,

Good question.  I am doing the paperwork to start a rollover self-directed IRA.  However, I do have some of the same thoughts as you.  Forget the rollover, just pull it out and pay the penalty and taxes.

The self-directed IRA could be invested in tangibles.  However, my level of trust is at zero and I don't believe the government is above "fooling" with retirement accounts.  After all, it was their idea initially.

sjdavis's picture
sjdavis
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Re: Contrarian money management

Mark,

Another thought... retirement accounts were created in the last 40 years.  The more I read, the more I realize we have been making many mistakes the last 40 years.  The bigger problem is that these mistakes have turned into status quo.  Money, energy, consumption, debt, etc., are all exponential as CM has demonstrated.  My concern is that if I just follow status quo, I'll be playing checkers when I should be playing chess, so to speak.

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suesullivan
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Re: Contrarian money management

Stu,

I've had a similar mind set toward responsible and frequent retirement funding, and similar realizations recently. I started by pulling out our Roth IRA contributions (taxes already paid, no penalty) to buy our first chunk of gold coins in November. That seemed like an easy decision.

 Late in December, I decided to take money out of my regular IRA and pay the taxes and penalties, for a couple of reasons.

We didn't have 20 percent of our assets in gold yet, and  this second purchase brought us up to that.

We're in a very low tax bracket right now so even with the 10 percent penalty, we lost 25 percent to taxes (I took out just enough to take us up to the next bracket) and with all the debt the country's taking on,I think it's a very good bet that income tax rates will be much higher in another 20 years when I'd be pulling this money out, assuming hyperinflation or currency crash hasn't wiped it out entirely.

It's weird to be doing something so utterly contrary to all my fiscal conditioning and not really having a qualm about it.

 I don't think I"m going to do any more raiding of retirement accounts yet. But I won't hesitate to if it starts to look like the system is breaking down completely.

 Fwiw,

Sue

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Dogs_In_A_Pile
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Re: Contrarian money management

Stu -

Great questions.  It seems to me that you have already answered the question.

For what it's worth, here's my take.  If you do take a portion out and buy silver or gold, you have established a hedge against a SHTF scenario.  If there is no SHTF scenario - you still have the gold - and whatever actions you have taken to that point will likely leave you better off anyway (eliminating your debt, becoming a member of a cooperative community, etc.).  Consider the penalty an insurance policy fee.  No one buys auto insurance and hopes they get into an accident just so they can exercise the insurance process.

I took all of my money out of my IRAs several years ago - my wife and I have a focused trading and investing strategy - and the money is fairly liquid (without going into too much detail on the thread).  We do a lot of options trading when the market is up or down and we roll a percentage of the cash generated into long term equity holding we also exercise (primarily through the sale of covered call options against the stock inventory).

If you decide to buy gold and/or silver, I would recommend taking physical possession vice certificates.  Your own call on safety deposit box in a bank or grandpa's cigar box buried in the tomatoes.

Ready's picture
Ready
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Re: Contrarian money management

 IMHO...

 Retirement is an interesting but short lived experiment. Social Security was formed and the concept of retirement came about due to the economic and political climate at the time (desperately needed to get the older workers out of the job pool to make room for the younger men). It was, in some respects, the beginning of the entitlement mindset of US citizens. We all know where that lead us...

It's time will soon be over. Retirement will only an option if you are surrounded by a group of people willing to work on your behalf to grow food, etc. I would think even in that scenario you would want to make yourself useful somehow!

The concept of saving for retirement will be as foreign in 10 years as the concept of retirement was prior to the invention of SS. I personally got out of all my retirement savings in 2008. I still find it a wise choice, but time will tell.

Good luck,

Roger

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pwoody82
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Re: Contrarian money management
In 1997, the Tax Payer Relief Act made it possible for precious metals to be added to IRA accounts. This includes silver, platinum and gold. Many IRA account holders put gold in IRAs as a way to achieve diversification of funds. As a rule, the price of gold rises when stock prices drop. This can even out your portfolio's value in a stock market weak period. 
Step1

Ask your IRA custodian if you can add gold to your current IRA account. Some plans may not have this capability. In this case, you must start a new gold-silver IRA.

Step2

Select a gold-silver IRA plan that is administered by a custodian who has a lot of experience dealing in gold. You may add gold to all types of IRAs, including traditional, Roth, simplified employee pension (SEP) and simplified incentive match plans for employees (SIMPLE).

Step3

Submit paperwork to the new IRA custodian to open your gold-silver IRA account. This includes a storage fee for the gold coins you will hold in your account. According to IRS rules, the gold must be stored at an approved depository, which is in a separate location from your IRA's custodian.

Step4

Transfer money from your existing IRA to fund the gold account. Ask a tax professional for help with rolling over funds if needed.

Step5

Decide whether to buy gold coins or gold mining stock and instruct your IRA representative to make the purchase for you.

The main problem of having it in your IRA is the cost of storage and the storage location which the government could confiscate. You can specify that the account is to hold physical gold, and you should be able to roll part of an IRA over into gold without having to pay taxes on it. It is a crapshoot unless you take physical possession and store it yourself. In any case, good luck.
At this point, I personally would not invest in gold stock although it is much harder for the government to confiscate a gold mine than it is to take your gold from the depository.
Gold coins must be 99.5 percent pure gold to be IRS-approved and put into an IRA. They must also be classified as legal tender to qualify. At this time, the coins that qualify are the American Gold Eagle, Perth Mint Lunar series and Kangaroo-Nuggets from Australia, the Canadian Gold Maple Leaf and Austrian Philharmonics coins. Holding stock from mining companies that mine gold is another way to add gold to your portfolio. This can be risky, though, in the event the company folds. However, as stocks rise, the yield can potentially be greater than that of gold coins. Factors to consider are your age--the younger you are, the more room for risk--and your total net worth. Account holders can choose between gold coins and bullion or gold stock. Remember there is some level of risk involved in all investment transactions. Consult your accountant or tax professional before making major decisions involving your retirement accounts.
Dogs_In_A_Pile's picture
Dogs_In_A_Pile
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Re: Contrarian money management

pwoody -

Nice post - good points.

One thing to consider - and I respectfully disagree - with one of your points:

"At this point, I personally would not invest in gold stock although it is much harder for the government to confiscate a gold mine than it is to take your gold from the depository."

In truth, it is quite easy to confiscate a gold mining company.  If THSHTF, I would expect the government to nationalize mining and mining exploration companies, oil refining and oil exploration companies and the like.  If the mining company you held stock in were to be nationalized, the stock would be worthless and your investment would be gone.  And you would have no recourse.

Good discussion of full and partial nationalization here (excerpt follows, link to full article below)

"More importantly, only full nationalization eliminates investors' incentives to concentrate capital in "too big to fail" banks before the crisis. Assume that a bank is insolvent, such that if it were not "too big to fail", regulators would insist it merge or wind down at a cost the the deposit insurance fund. But the bank in question is too big to fail, so regulators cannot wind it down. The government is then forced to become the capital provider of last resort. Existing shares would be worthless under this scenario, if the bank had no power to threaten a chaotic failure. However, after a recapitalization, the reorganized bank might become a very valuable. The bank retains its existing network of branches, benefits from the deposits and habits of its old customers, and may leap from sickest bank to safest bank with a single "bold" injection of government capital. If the old shareholders are permitted to ride along after the reorganization, they reap a large reward from having invested in a bank that was too important to fail.

Suppose that a bank whose true book equity is $0 has failed to mark down some assets, and shows a position of $10B. The bank receives a $90B capital injection, valuing existing shares at book. Then the old equity whose true value was precisely zero prior to the recapitalization suddenly has a real book value of $9B. That is, old shareholders reap an immediate windfall from the recapitalization, and the size of the windfall increases in direct proportion with the amount to which management had lied about the banks losses! Further, the market value of old equity should rise by much more than that $9B, since all of a sudden, the bank switches from a horseman of the apocalypse to a going concern with a bright future. Failing to exclude old shareholders from a post-recapitalization bank results in a transfer of wealth from taxpayers to shareholders in proportion to the degree to which i) they invest in "too big to fail" banks, and ii) encourage management to understate asset impairments in their books. Those are really bad incentives. The details of this story change a bit if, for example, the recapaitalization comes in the form of preferred equity with warrants, or if market values rather than book values are used to estimate the how much dilution old shareholders suffer. But the core bad incentives do not change.

By eliminating private shareholders entirely, full nationalization permits regulators to "do what needs to be done" to restructure the firm without having to hew to a fiduciary duty of profit maximization in designing the new structure. Full nationalization limits the ability of shareholders to extract windfalls from taxpayers by becoming "too big or interconnected to fail". Finally, full nationalization makes it possible to value assets ruthlessly, thereby eliminating market uncertainty about whether a bank is really fixed. Either to maximize their share of a recapitalized firm or to maximize the subsidy in a "toxic asset" purchase, legacy shareholders will always insist on optimistic asset values. But getting past a banking crisis requires working from an assumption of extremely pessimistic values."

http://interfluidity.powerblogs.com/posts/1232705449.shtml

scotthw's picture
scotthw
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Re: Contrarian money management
MarkM wrote:

Stu,

Good question.  I am doing the paperwork to start a rollover self-directed IRA.  However, I do have some of the same thoughts as you.  Forget the rollover, just pull it out and pay the penalty and taxes.

The self-directed IRA could be invested in tangibles.  However, my level of trust is at zero and I don't believe the government is above "fooling" with retirement accounts.  After all, it was their idea initially.

 

I am in the same process of rolling my IRA into a self directed.   I will be investing in tangibles, but no longer contributing to it.  Also reduced my 401(k) to employer match and using the rest to buy physical PMs.

Also moved a chunk of JPMC cash to Everbank.  Convinced family members to at least spread their cash around to safer places - can't convince them of much else at the moment ... <sigh>

... and relieved all banks of a significant chunk of ready cash.

My brand of diversification ;-)

 

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ao
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Posts: 2220
Re: Contrarian money management

You can put your money into precious metal coins in an IRA and not pay any penalty.  Many gold coin dealers would be able to help you with this.  I've invested through several including Don McAlvaney's ICA.  With regards to personal physical possession of precious metals outside of a retirement account, it's obviously safer than having another party hold it in storage but there are several problems:

1) They still have a record of you purchasing it so you are still subject to confiscation.

2) There's the security problem of where do you keep it (metal detectors in a garden are the first place I'd look if scavenging for gold or silver).

3) You'll pay a high collectibles tax when you sell it, much higher than a capital gains tax.

Personally, I have precious metals both in and out of retirement accounts.  I also go by the rule of diversification through location (in addition to diversification into non-correlated assets).  Whether in cash, foreign currencies, precious metals, reverse index funds, ammunition, cigarettes, whiskey, or whatever, never, ever, EVER keep all your assets in one or even two institutions or locations.  Spread them around as much as possible so that if one or two of those institutions or locations are in trouble, you have plenty of back-up.  Also, put nothing in a safe deposit box.  If TSHTF, it'll be gone. 

Don't wait until things start to deteriorate even more.  Historically, it always happens so quickly you won't be able to act in time.

Brian 

 

 

 

WhoKnew's picture
WhoKnew
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Re: Contrarian money management

It may sound crazy but youre taking the first steps away from the matrix. These doubts you have regaridng "conventional wisdom" will grow until you come to the point where you want them to have as little control of you as possible.

Lots of great feedback for you in the thread.

One more thing - conventional wisdom is what got us here.

sjdavis's picture
sjdavis
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Re: Contrarian money management

One thing that needs to be reiterated is what you said, lots of great feedback in this thread.

The level of time and detail people have contributed is incredible.  Thanks to all for sharing your experience, expertise and opinions.

Stu

watsondog's picture
watsondog
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Re: Contrarian money management

Can one make the assumption that the 401K will be around, exist with the same rules, and have safe custodians in 5 years? That is an underlying question that makes spreading the 401K around a mute point. During the election there were hints of nationalizing these accounts but that could be political election fear aimed at getting votes. Just the same here is a link that examines this better than I can

http://www.bestwaytoinvest.com/stories/will-obama-nationalize-us-private-pensions

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