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Converting 401k and IRA Funds Into "Steady Payment Streams"

George Washington's picture





 

Last May, I wrote about the rumor that the Obama administration might seize funds from American's 401k and IRA accounts.

Last week, Bloomberg pointed out:

The
Obama administration is weighing how the government can encourage
workers to turn their savings into guaranteed income streams following
a collapse in retiree accounts when the stock market plunged.

 

The
U.S. Treasury and Labor Departments will ask for public comment as soon
as next week on ways to promote the conversion of 401(k) savings and
Individual Retirement Accounts into annuities or other steady payment
streams, according to Assistant Labor Secretary Phyllis C. Borzi and
Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the
effort...

 

There is “a tremendous amount of interest in the White
House” in retirement-security initiatives, Borzi, who heads the Labor
Department’s Employee Benefits Security Administration, said in an
interview.

 

In addition to annuities, the inquiry will cover other
approaches to guaranteeing income, including longevity insurance that
would provide an income stream for retirees living beyond a certain
age, she said.

 

“There’s been a fair amount of discussion in the
literature taking the view that perhaps there ought to be more lifetime
income,” Iwry, a senior adviser to Treasury Secretary Timothy Geithner,
said in an interview...

 

One proposal raised by Iwry as co-author
of a paper while at the Retirement Security Project, before joining the
administration, has reached Congress. A bill requiring employers to
report 401(k) savings both as an account balance and as a stream of
income based on an annuity was introduced on Dec. 3 by Senators Jeff
Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican,
and Herb Kohl, a Wisconsin Democrat.

Sounds innocuous, right?

Maybe.

But Karl Denninger and Jesse smell a rat.

Denninger writes:

In a short conversation this noontime ... Rick Santelli was talking about a potential to effectively force money into the Treasury market.

 

Where would they get this?

 

From your 401k and IRA accounts!...

 

Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!

 

Forcing people into Treasuries as an "annuity" is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!

 

Guess
what? They'll do that here too - you're going to "invest" in Treasuries
which of course are effectively a CALL option on the future taxing
ability of the government.

 

The problem is that with an aging population and the immigrant problem (illegal immigrants that is), along with offshoring, the aggregate wage base will drop and thus this is the most dangerous investment of all!

What's
even worse is that the government has intentionally suppressed Treasury
yields during this crisis (and will keep doing so by various means,
including manipulating the CPI - the "inflation index" - as they have
for the last 30 years) so as to guarantee that you lose over time compared to actual purchasing power...

 

"Choices"
have a funny way of turning into mandates, and this looks to me like a
raw admission that Treasury knows it will not be able to sell its debt
in the open market - so they will effectively tax you by forcing your
"retirement" money to buy them!

This may be the
only way for Treasury to hold down interest rates to something
reasonable in the intermediate term, but doing so will instantaneously
remove a major source of funding for the stock market - that is, the
monthly and quarterly inflows from retirement accounts.

 

You can bet this won't be good for you, the ordinary American.

 

You
can also bet that once such an "option" is made available there is a
very high probability of the government doing things that either
promote or simply don't stand in the way of another stock market crash
as a means of "herding" your money into Treasuries - so they can blow
it - all under the guise of being allegedly "safe".

 

Of course this begs the question - what
if the government can't pay down the road when you retire, just as they
can't pay on a forward basis with Social Security and Medicare?

 

This "proposal" can only mean one thing - Treasury smells smoke. Maybe you should pay attention to what they're huffing!

And before you say "oh they'd never do that" I want you to read this:

Here
is a warning to us all. The Argentine state is taking control of the
country’s privately-managed pension funds in a drastic move to raise
cash.

...

 

My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so.
The forced-feeding of banks with fresh capital – whether they want it
or not – and the seizure of the Fannie/Freddie mortgage giants before
they were in fact in trouble (in order to prevent a Chinese buying
strike of US bonds and prevent a spike in US mortgage rates), shows
that private property can be co-opted – or eliminated – with little due
process if that is required to serve the collective welfare.

Jesse has a similar take:

As
a rule of thumb, the worst possible time to convert lump sum savings
into a fixed income annuity would be when interest rates are
historically low.

Although products may vary, this is roughly
equivalent to buying long term bonds at a time when interest rates are
likely to increase, substantially reducing your principal in real
terms, and eroding your fixed returns through inflation.

For
some reason the Obama Administration is promoting the idea now that
there should be some encouragement for Americans to start converting
their 401K's and IRA's into annuities, to provide themselves with
lifetime income.

The effort is being spear-headed by Mark Iwry of the Treasury and Phyllis Borzi of the Department of Labor. Here is a paper written on the subject by Mark Iwry when he was at the Brookings Institution.

The
essence of this paper is that distributions from IRA's and 401K's would
automatically be rolled into an annuity providing a monthly income by
default.

This concept is known on the Street as the handling
fees for meager returns pork barrel pigfest. The Fed likes it because
they will undoubtedly get a two year rolling chunk of the people's
retirement cash to play with.

Perhaps just rolling those 401K's
and IRA's into Social Security or the Long Bond would be what they have
in mind. Somehow the panacea of TIPS with inflation defined by the
government sounds probable. The drawback perhaps is that this would not
generate the highest recurring fees for Wall Street and the FIRE
sector, which have to be eyeing that 'cash on the sidelines' hungrily.

How about Patriot Bonds
that are fully invested in Mortgage Debt formerly owned by the Fed,
with some tranches of Commercial Real Estate to add some zest to the
recipe? The Treasury can give this option a small tax break, which can
be largely consumed by Wall Street fees and mispricing of risk returns
...

My model for thinking about this annuitization is that the
government wishes to appropriate your savings for a 2.0% return, ex
fees and mispriced risk and inflation, as a source of funding for the
bailouts of an oversized and insolvent FIRE sector (like AIG) and the
imploding pretensions of a global financial elite...

Administration Explores R Bond For Retirement Accounts - Investment News 7 June 2009

Why
have a separate "R Bond" instead of those government bonds they have
now called 'Treasuries?' And why have a mandatory universal retirement
system when you have this thing called 'Social Security?' Think about
it. Sounds like the kind of preparations governments make for things
like 'new dollars' after a selective default.

Are Denninger and Jesse right?

I don't know ... we'll have to wait and see.

 


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Fri, 04/29/2011 - 06:51 | Link to Comment ClairD
ClairD's picture

Hi there, I decided to empty my IRA so I would have some peace of mind in this highly unstable economy that the gov't will not have a chance to put their paws on my hard-earned money. Raiding retirement accounts has been a common source of emergency cash for many individuals during the past few years. Retirement account are supposed to guarrantee us of the financial support after retirement, but the desperate government and economy of our times are precisely the main reason why people are willing to incur the penalties that come with taking money out of an IRA early (I'm talking about the 10% penalty + regular withdrawal tax that applies). For those who are planning to take the money out and aren't sure of what to do, I'd advice you to get professional / knowledgeable person's help as there also are penalties for making a mistake.

On the otherhand, handling the money yourself requires a good financial managament skills and responsible decision-making so you don't put yourself in a crisis. You can read some article here: More people raiding retirement accounts when short of cash. Think hard and decide wisely on where you'll spend your hard-earned money.

Sun, 01/24/2010 - 15:20 | Link to Comment Anonymous
Wed, 01/13/2010 - 15:23 | Link to Comment the grateful un...
the grateful unemployed's picture

The plan would be to bailout the 401K plans, and back the equities with with treasuries. The timing of the plan is the question. The natural impulse for investors is to sell at the bottom of the market will impoverish them further in the long run, which the government does not want. They want your vote.

Equities held through a mutual fund, or an equivalent (ETF's?), are prime victims of the sell at the bottom mentality, and for those holding paper on gold in the GLD, good f**king luck. In a deflationary crash people sell paper to raise cash. (For a while now I notice the market goes up on the first of the month, and similarly that's when food stamp benefits (SNAP) are credited to debit card accounts. Now you know that there are maximum asset thresholds which prevent you from applying, unless your assets are in a 401K. To apply for food stamps, you first have to move your money into a 401K, or other retirement account. With so many people living out of their 401K, the government of CA for one is actively soliciting new SNAP applications, - to stop the bleeding - and because the number of people the state has on SNAP adds to the federal funds they receive. ERGO what we are seeing in the market is what I call the FOOD STAMP EFFECT, money NOT being removed from 401K plans, which is allowed to be invested putting a bid under the market.

The Fed has the power to QE anything, houses, cars or dogs. They can and will QE 401K plans,ideally if you don't need your 401K you could ride it out, and so those of you who read it this way have already done something, and of course you will contribute taxes to the IRS, which makes it a lose lose situation. If you're still in your 401K by all means apply for SNAP. But to turn what Reagan once said on its head, "If you can make your own bread, stay off our rolls..."

If you can't make enough money to get by, get on the SNAP program by all means, its the patriotic thing to do.

Thu, 01/14/2010 - 01:30 | Link to Comment dark pools of soros
dark pools of soros's picture

and SNAP is just another driving factor raising the price of food staples like bread, etc...  if you could buy liquor with it good scotch would all be over $200 a bottle

Wed, 01/13/2010 - 14:26 | Link to Comment Anonymous
Wed, 01/13/2010 - 13:55 | Link to Comment Anonymous
Wed, 01/13/2010 - 13:49 | Link to Comment Anonymous
Wed, 01/13/2010 - 13:38 | Link to Comment trav7777
trav7777's picture

lol...Douchinger again cribbing.  I was the only one on TF who argued that the USG would come after retirement cash; they called me a lunatic.

The government is like someone drowning who cannot swim, they will grab anything and everything they can in an attempt to stay afloat.  You cannot get near them or else they will pull you under trying to keep their own lungs breathing air.

Wed, 01/13/2010 - 12:55 | Link to Comment resaci
resaci's picture

You have 60 days to replace a distribution with no tax effect. If a traditional IRA is converted to a ROTH this year, you can push the income ahead, 50% in 2011 and the other 50% in 2012. Not sure what happens with the 10% penalty. Anyone know what happens with the 10% penalty?

Wed, 01/13/2010 - 15:51 | Link to Comment A_MacLaren
A_MacLaren's picture

When you convert a regular IRA to a Roth IRA, there is no penalty, only taxes that are due.

If you try to access that money (the principal) within 5 years, then there are penatlies, unless you are of retirement age 59.5 year.

This is coming off the top of my head,so check here:

http://www.irs.gov/pub/irs-pdf/p590.pdf

 

Wed, 01/13/2010 - 12:52 | Link to Comment Anonymous
Wed, 01/13/2010 - 11:43 | Link to Comment Anonymous
Wed, 01/13/2010 - 13:05 | Link to Comment Anonymous
Wed, 01/13/2010 - 11:30 | Link to Comment dhengineer
dhengineer's picture

My wife and I decided to cash out our IRA's, pay the taxes, and buy a little house in upstate NY for cash.  We don't have a lot, but the house was cheap, and the tax break for house purchases just about covers the 10 percent penalty for cashing out.  Plus, our primary residence will now be outside New York City so we can avoid the NYC local tax.  We can grow quite a bit of food, and we'll have a little hide-away in case the Sheeple wake up and decide to take matters into their own hands.

Wed, 01/13/2010 - 14:15 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Well done dh, bravo.  I bit the bullet and got out of mine as well.  Sleep better.

Part of MY money went into gold.

Wed, 01/13/2010 - 10:58 | Link to Comment Anonymous
Wed, 01/13/2010 - 11:25 | Link to Comment Anonymous
Wed, 01/13/2010 - 19:32 | Link to Comment Neo-zero
Neo-zero's picture

I too would love to see that article!  I've already made an appointment with my accountant to look into the tax ramifications because I'm not liking the looks of things to come.

 

Thu, 01/14/2010 - 01:15 | Link to Comment dark pools of soros
dark pools of soros's picture

you can take a loan out for up to 50% of it...  great way to 'take chips off the table'

 

also you can nag whoever runs your plan to add other funds you like better

Wed, 01/13/2010 - 11:23 | Link to Comment Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

I think GG would recomment taking it out, taking the penalty and going gold.

 

Mathematically, if they do nothing else, they pretty much have no choice but to take 401Ks and IRAs. It still won't stop the bleeding for long.

Wed, 01/13/2010 - 10:45 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The classic Hegelian Dialectic "problem, reaction, solution" meme unfolding before our eyes. Of course, who caused the problem in the first place? Is there really a problem at all (many investment accounts are within 30% of their previous high) who says there needs to be a government solution etc?

The reason we repeat our mistakes is not that we don't learn from history. Some entities are clearly learning from the past and understand that the oldest tricks are the best tricks. The reason "we the people" don't learn from our mistakes is because we don't know ourselves. You can't learn what you're unwilling to study and understand.

As long as we continue to live the inauthentic life, shielding ourselves from ourselves, not demanding of ourselves truth and honesty, insisting that others in this world educate, entertain and nourish us, we are ripe for the picking. And there are plenty of evil entities more than ready to pluck us. We are our own worst enemies. Of course, this is not what we want to hear, so we shield ourselves from this most basic of truths as well.

Wed, 01/13/2010 - 13:53 | Link to Comment Jean Valjean
Jean Valjean's picture

http://www.biblegateway.com/passage/?search=1%20Samuel+8&version=NIVUK

But the people refused to listen to Samuel. No! they said. We want a king over us.  Then we shall be like all the other nations, with a king to lead us and to go out before us and fight our battles.

Wed, 01/13/2010 - 23:14 | Link to Comment dark pools of soros
dark pools of soros's picture

..and a King to sell us burgers and fries

Wed, 01/13/2010 - 10:43 | Link to Comment pros
pros's picture

This is a multi-stage process:

1. separate equity holdings of working people from the wealthy by placing the working peoples' money in the 401K/pension pot

2. Force the working people to convert to treasury holdings

3. devalue the treasury security and inflate equity security value

QED, more wealth transfer and painless treasury debt reduction

Wed, 01/13/2010 - 10:17 | Link to Comment Schlep
Schlep's picture

This is the, the end my friend.

Jim Morrison.

This is the plan from way back. Did you honestly believe the FEDS would leave that "additional retirement fund", alone when it was put into law a generation ago. I the working poor believe this is a done deal we just have'nt been mailed the new prospectus. Tell me who in our gubment is capable of taking on the FED and Treasury to stop it?

 

 

Wed, 01/13/2010 - 23:12 | Link to Comment dark pools of soros
dark pools of soros's picture

Ron Paul

Wed, 01/13/2010 - 10:18 | Link to Comment Zippyin Annapolis
Zippyin Annapolis's picture

Argentina confiscated all retirement accounts (then backed them by Argentinas "full faith and credit") to prop up their currency. Government created and managed IRAs and 401k's are the first step in my view.

 

Why would anyone convert a Roth IRA into a taxable income stream even if there is a "guaranteed return"?

 

Lower income folks can Now set up Roth IRAs--tax free returns.

 

Also this year and next Everyone can convert their IRS's into Roths. This would normally be a no brainer Except for the Cleptocracy aka the US Treasury. The possiblity of paying taxes currently to convert ordinary IRAs to a Roth IRA has to be a meaningful risk given the lack of intergrity the US Treasury has shown over the last 3 years.

 

Chances are there will pass a law passed in the coming years assessing a fee or tax on Roth payouts. Count on it.

Wed, 01/13/2010 - 10:07 | Link to Comment Anonymous
Wed, 01/13/2010 - 10:00 | Link to Comment Anonymous
Wed, 01/13/2010 - 13:40 | Link to Comment Anonymous
Wed, 01/13/2010 - 16:52 | Link to Comment legerde
legerde's picture

Im so sorry your dad wasn't rich.   Mine wasn't either...  It's no reason to hate...

I pay taxes on the money I earn now.   This money should be "mine" to do with as I please.. I already paid tax on it. 

If you have a children, you "usually" want them to succeed.   A good man protects his loved ones.  I am ensuring that my children will never need me, but it will be nice to keep the fruits of our tight-nit families efforts "in" the family.   Taxing our family twice is unfair.

I'd rather my kids benefit from the labor than feed the monster of our corrupt government.

 

Wed, 01/13/2010 - 09:54 | Link to Comment docj
docj's picture

If they simply replayed the market tape from 2009 (skunk it in March, run it back up through October) people would be primed to have Lord Barry ride in on his unicorn.

"I'm from the Gubiment and I'm here to help."

And the sheeple will bleat approval, never knowing this was all done on purpose.

Wed, 01/13/2010 - 09:45 | Link to Comment Anonymous
Wed, 01/13/2010 - 09:37 | Link to Comment Anonymous
Wed, 01/13/2010 - 14:59 | Link to Comment DiverCity
DiverCity's picture

Well bye, bye birdy.  You're wrong -- it will go somewhere and that's where at some point, like Guilarducci advocates, it will be the only investment option.

Wed, 01/13/2010 - 09:28 | Link to Comment Anonymous
Wed, 01/13/2010 - 09:17 | Link to Comment Anonymous
Wed, 01/13/2010 - 03:13 | Link to Comment Chopshop
Chopshop's picture

great piece.  entirely on-point up until the selective default absolute nonsense conflation.

Tue, 01/12/2010 - 23:17 | Link to Comment Apocalypse Now
Apocalypse Now's picture

I have no issue with adding the option of treasuries to the 401k menu, and at the same time the menu option of adding a gold or a precious metal choice run by a reliable entity like GATA (that audits gold holdings) should be mandated.

I WOULD ARGUE LOUDLY THAT Pension and 401K administrators/fiduciaries are not fulfilling their prudent man principle rules including options that encompass a fully diversified portfolio if the menu option does not include gold (this was the #1 investment with the highest returns over the last 10 years). 

Think about that, we should all push for the inclusion of gold/silver investments (auditable) and other hard asset commodities in the 401K menu.  Think about it, real estate is included as a diversified option, why not hard asset choices with commodities to further diversify portfolios?

Wed, 01/13/2010 - 14:17 | Link to Comment Andrew E.
Andrew E.'s picture

Apocalypse Now, you write:

 

"at the same time the menu option of adding a gold or a precious metal choice run by a reliable entity "

I agree but this will never happen.  The Fed and USG, though they would deny it publicy under threat of torture, know full well the power of gold. That's why they confiscated it once and hamstring its ownership today with capital gains taxes.  For all their professed faith in the fiat dollar, the Fed and USG will never willingly repeal the legal tender laws and let the Dollar compete on a level playing field with gold.  And allowing direct gold investment/ownership via 401(k)/IRA plans is a slipperly slope on the way to the remonetization of gold.

Wed, 01/13/2010 - 19:51 | Link to Comment Neo-zero
Neo-zero's picture

"The Fed and USG, though they would deny it publicy under threat of torture, know full well the power of gold."

 

Funny you bring up the threat of torture on a George Washington guest post after all torture doesn't work or so I've heard!

 

Great post GW.  I mean that sincerely.  I posted something about the jesse piece earlier this week and I see others have also.  I'm sure this has been on alot of minds and if not then people need to be informed.

Wed, 01/13/2010 - 12:55 | Link to Comment ATG
ATG's picture

Investing with a rear-view mirror extremely

hazardous...

http://www.jubileeprosperity.com/

Wed, 01/13/2010 - 17:01 | Link to Comment Ripped Chunk
Ripped Chunk's picture

SICK OF jubilee prosperity link DID I SAY I WAS SICK OF IT?

Wed, 01/13/2010 - 10:22 | Link to Comment Crime of the Century
Crime of the Century's picture

+1 The Fed offers a bond index "F" fund menu option in their own retirement savings plan. Ain't no way they would allow PMs in unless it was GLD/SLV, and if they did that it would be as another system prop. I wonder what would happen to gold held in IRAs in the outlined scenario... nothing good I would imagine.

Wed, 01/13/2010 - 23:05 | Link to Comment dark pools of soros
dark pools of soros's picture

most 401k plans don't even offer real emerging market funds..   they will after it peaks so they can rob you..   and they will offer gold too once that peaks again

 

401k is only good for the matching - all you have to do is break even and you double. (I assume 100% matching..sorry if you are getting robbed)  Take the rest of your money and do anything you damn well please with it

Wed, 01/13/2010 - 11:19 | Link to Comment Species8472
Species8472's picture

The Feds also offer the 'G' fund. A stable value fund paying the 10 yr tBond rate.

Tue, 01/12/2010 - 23:10 | Link to Comment crzyhun
crzyhun's picture

Robo et.al. this is a grab like no other. I have to say as a professional this is the deathnel of free markets. Sorry about your girl friend. For my accounts we did fine 2000, and yes got hit hard in 2007-8. Made up most of it is '09 only  a little off pace. The key for any good and solid advisor was to work the account according to the clients goals, needs, tolerances and reassure, but work like hell to make good on the oath, to do no harm....This will do major harm if we get a whiff of inflation, have higher taxes and people under save. Fixed products have a role but not a sole role like a fixed annuity/SS or any other guaranteed income contract.

Tue, 01/12/2010 - 22:04 | Link to Comment RobotTrader
RobotTrader's picture

So far, bonds have been in a 26-year bull market.

The Sheeple will be happy to have their retirement invested in "risk-free" assets.

Every single week, my girlfriend begs me to transfer her stock allocation in her 401(k) account and put it into something "safe".

She got caught at the top in 2000, and watched her account get cut in half.

Then rode things up into 2007.

Then watched her account crash in 2008.

Never again.  She says her account has not recovered yet.

I bet there are millions out there just like her.

Thu, 01/14/2010 - 00:30 | Link to Comment Sam Clemons
Sam Clemons's picture

My g/f just got an email saying that their "Guaranteed Income Fund," which invests completely in Govt Securities, is "guaranteed at 3% for the first 6 months of this year."  Seems like something is going on.  This is of course less interest than the PIMCO fund also offered.

 

 

Wed, 01/13/2010 - 11:37 | Link to Comment Shiznit Diggity
Shiznit Diggity's picture

Good, then there's no reason for compulsory annuitization. Make it voluntary.

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