“Smart Money” Is Not In Qualified Retirement Plans, Or Is It?

“Smart Money” is really a euphemism for folks who made correct financial choices over time. Very few qualify.  I don’t.  Do you? What follows is an example of one of the dumbest financial choices everybody makes, and a demonstration of how “Smart Money” behaves differently.

A man went to a bank in order to arrange for a loan.  The banker approved the loan application, established the payment schedule, and asked the man to sign.   The man asked, “what’s the interest rate for this loan?”  The banker said, “we here at our bank are having a very good year, so we won’t be charging interest until the end of the loan.”  The applicant asked, “so I don’t pay any interest until the end?”  “That is correct,” said the banker.    “What will the interest rate be when I pay it?  the man asked. “We will determine that then,” said the banker,  “it depends on how we’re doing then.”

The notion that a bank would lend money without receiving interest is absurd, but so is the idea that the government would allow you to have income without taxing it.  The marriage of “government” and “financial sector” interests have produced you, a trusting offspring.  They both take advantage of your natural inclination to trust well known institutions.    On one hand, the fact that government will
wait for its tax dollar should make you sit up and take notice.  On the other, financial firms are famous for obfuscating their real costs of doing business as they stealthily deplete the accounts they service. 

Does “Smart Money” have funds in qualified plans?  Sure it does, but not like most of us.  It only signs up for annual contributions depending on what an employer matches. There is about 14 trillion dollars being held in 401K type accounts.  When those funds are sent out to account holders  4 or 5 trillion will be paid in taxes right off the top.  That is, of course, for everyone but the “Smart Money”.  “Smart Money” only put in what was matched, so it doesn’t have to pay the tax out of its own pocket.  Its employer already paid it when the money was originally contributed.