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Thursday, October 9, 2008

Disincentive of 401K

The rate cut effectively made contributions to 401K's less attractive than to say servicing consumer debt. With recent looses and the prospect for growth in 410's retarded the cut effectively was a disincentive to contribute.

The long-term interest of any held debt paid to principal exceeds return on savings in a structured 401.

In addition the nominal penalty of losses for early withdrawal of 410 funds offset by low interest return applied to a long-term interest payment is attractive.

As an example 15% penalty of say 20K was a disincentive, that fund now reduced to say 10K and offering 1.5% return, best case scenario if in fixed return applied to amorotized long-term debt makes taking the penalty and applying it to that debt attractive, or meeting higher capital requirements for refinancing.

The rate cuts need to be weighed in regard to creating an incentive to transfer liquid assets into non-liquid assets.

If the mortgage is large, long-term, and the opportunity to pay off principal is available, I could easily demonstrate the advantages from a tax and finance perspective of liquidating a 410, applying it to mortgage, and thus realizing a better return of dollar.

Expect this trend as main-street and the proletariat realizes the facts regarding interest. Emotionally employees participate in 410's with their employers, if the job-losses mount, as empoyment is sought and real-estate transactions require relocation, expect this trend to be performed by white-collar workers.

In that respect, the inability to receive a return on 410 investment, especially where it is not matched, I see the rate cut as a disincentive to main street.

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