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Wednesday, January 19, 2011

Will The State Steal Your IRA Or 401(k)?

In Europe, some private pension plans were nationalized. This helped plug holes in the government's budget.

Governments are exempt from the accounting rules that apply to individuals. State thugs can seize the pension assets, spend the money immediately, and promise to pay benefits out of future tax receipts.

That's stealing. However, State thugs may do whatever they want.

In the USA, IRA and 401(k) plans are a tempting target. There were proposals for the State to seize IRA and 401(k) accounts.

The Social Security tax does not create a contract between taxpayer and government. At any time, benefits may be cut, directly or via inflation. You must pay the tax, or State thugs will kidnap and torture you. There is no promise of future benefits. The pretense of benefits must be maintained, lest the slaves object and revolt and refuse to pay.

Similarly, an IRA or 401(k) does not represent a contract with the State. At any time, the tax rules may be changed. That shows the fallacy of investing in a State-licensed retirement plan. When you consider that the US government and financial system won't exist 20 years from now, an IRA seems like a stupid investment.

My IRA is invested in State paper. In a sense, the State already has my investment. My IRA doesn't contain any tangible assets. I'm not owed tangible goods and services until I spend my IRA savings.

Here's the "steal everyone's IRA proposal". Right now, the IRA is a bank account specifically for you. People withdraw from their IRA every year, and their heirs keep any money leftover when they die. For example, if your life expectancy is 15 years, then you must withdraw 1/15 of your IRA that year. If you die before you withdraw all the money, your heirs get it. The IRA is a savings account from which you withdraw like an annuity.

The proposal is "Force everyone who retires to buy an annuity from the State, rather than withdrawing from their IRA." Insurance corporations will administer the annuity, making a nice pork profit.

An annuity is a contract that pays an equal amount every month, until you die. The fallacy is that an annuity contains direct and hidden fees. The price of an annuity depends on:

  1. mortality rate assumption
  2. fees/loads
  3. interest rate assumption
Of these, (3) is by far the biggest cost. An insurance corporation invests the annuity in "risk-free" bonds, i.e. Treasury bonds. The interest rate is 2%-4%. You could do much better on your own in an IRA, either in stocks or in GLD/SLV.

The forced annuity purchase would be a huge ripoff. A pro-State troll says "You're buying the annuity at the fair market price. It's reasonable." The fallacy is that an annuity contract contains fees. The hidden fees are greater than the explicit fees. The biggest hidden fee is that an annuity pays an implied interest rate of only 3% or less, compared to what you would earn in the stock market or gold or silver.

An annuity is a ripoff, because the implied interest rate of the annuity is much less than inflation.

The forced annuity conversion would be a huge windfall for the State. They would make a killing on the annuity fees, especially the interest charges.

The forced annuity conversion allows the State to steal your IRA or 401(k), while pretending they didn't actually steal it.

I don't see this proposal going anywhere. Financial advisers already make a fortune off IRAs. Clueless people invest in funds with a load of 1%/year or more. However, stealing a couple percent of your savings per year isn't enough. State thugs want all of it!

There's a very good chance that the State won't exists 20 years from now. Given that, it seems foolish for me to have an IRA. Really, I should cash it out, pay the tax penalty, and buy gold/silver. However, where can I safely store the metal?

I'm not absolutely sure that the State will collapse in 20 years. I'll keep my State paper investments as a hedge.

3 comments:

Anonymous said...

http://www.dollarvigilante.com/blog/2011/1/6/the-american-dream.html

The web page above has a really cool video on it about the corrupt monetary system and Federal Reserve Bank.

It is mega cool and highly recommended.

FSK said...

I didn't have time to watch that yet.

I have noticed that a lot of other blogs are making the "Compound Interest Paradox" argument, but they call it by other names.

Anonymous said...

This happens also in Hungary (although not called IRA, but "obligatory private pension funds").

Converting in gold is not really an "option" here. Most people don't even know what is gold. And for the ~USD 5000 (the average balance of a hungarian pension funds account) you could not buy much gold either. (Top private pension funds accounts balance are about USD 25000. We didn't have enough time to collect assets there: typically the 8% of one's salary before taxes is saved there in the private pension fund account. The state gets 24% of the untaxed salary.)

This private pension system was introduced in 1998: originally planned we will get 25% of our pension from the private pension funds and 75% from the state. The best earning pension funds account earned 0.6% above inflation yearly (average).

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