Are 401Ks and IRAs a “Deal With the Devil?”

There was a tweet recently by a financial professional challenging the benefits and default status of 401k/IRAs. His point was that it ties up all your assets until the future and you're taking a gamble (if you contribute to a tax-deferred account) that your tax rates will be lower when you retire than they are now. As a reminder - withdrawals from retirement accounts are taxed at ordinary income rates - not capital gains rates. He also mentioned that it makes much more sense to invest in regular brokerage accounts since it's subject to capital gains tax rates (which are usually lower than ordinary rates) and the cash is available when you want/need it.

Our take? The best investment strategy is to diversify across multiple channels that will both serve you in the long term and the short term. Let's be honest - forcing people to lock up money until they retire isn't necessarily a bad thing - it guarantees some type of income to pull from later in life. I also think the tax-deferral of the investment is valuable as well due to the time value of money, a dollar today is worth more than a dollar tomorrow. In theory what someone could do with the taxes saved through investing in tax-deferred accounts, they could turn around and invest in regular brokerage accounts or alternative investments such as real estate.

That said, we do find (both personally and with our clients) that so many folks default to putting all of their money in a 401k or IRA when there are really good arguments to keep meaningful amounts of money in taxable accounts. This is one of those questions that is best addressed in a holistic process that considers your entire financial and life picture.