James Altucher, a writer and entrepreneur, has been saying for quite a while that you should forgo contributing to your company’s 401k plan.  He says they are a scam and has his various reasons.

I have written about James Altucher before.  He is a great motivator and a brilliant mind.  He has also made some terrible mistakes in his life by making a lot of money and then blowing it all.  I think people should listen to him.  You can learn from him in what to do and what not to do.

He likes to go against the grain on many things.  He says you shouldn’t buy a house.  He says you shouldn’t go to college.

He recently was in a video making his case on why 401k plans are a scam.  He received a lot of flack, as several major outlets published articles criticizing him, such as this one.  Altucher responded in another podcast.

While I am no moderate when it comes to my political views, I am something of a moderate on this topic.  I think there are advantages and disadvantages of contributing to a 401k plan.

In a sense, they are a bit of a scam.  It is a government invention.  If there were no income tax, then a 401k plan would not be necessary.  You wouldn’t need to defer taxes because there would be no taxes.  You could just save your money how you want.

The advantages of contributing are obvious and they are ingrained in our heads.  Most people can get a company match.  You can defer your income taxes.  I don’t need to go over these in detail because they are well-known.  Instead, I will discuss the disadvantages.

One major problem is that the government is in control of your 401k plan.  The government could change the rules at any time.  It could make it even harder to withdraw by raising the age and making early withdrawal penalties stiffer.

There is also the issue of taxes.  You are supposed to contribute because you can defer your taxes.  Unless you are talking about a Roth 401k, then you really don’t know if your plan will benefit you.  What if taxes are much higher when you retire?

But my biggest case against contributing to a 401k plan is that you are locking up “your” money and there are potential opportunity costs to it.

If you contribute $5,000 in a year to your 401k plan, then that is $5,000 that you don’t have access to right now (maybe a little less because of taxes).  You can’t touch that money, except in certain circumstances, and even then you will probably have to pay a penalty on top of income taxes.

What if someone comes to you with a business offer that you think is great but you need $5,000 to get it started?  What if you don’t have the money because you put all of your savings in a 401k plan?

What if you took that money and put it in investment real estate?  Would you rather have a debt-free investment property in 30 years or a mutual fund that may or may not go up in value?

In the case of James Altucher, he would be much better off with the money today than locking it up in some retirement plan.  As long as he doesn’t return to his reckless ways, he would find a way to put it to good use in investing in himself and his many business ventures.

In this sense, 401k plans are good for people who have no other plan. If it is between saving for retirement or spending it in Vegas, then you should probably go with retirement.  But even here I can’t say for sure because you may derive a lot of pleasure in Vegas.

So overall, I think the decision of contributing to a 401k plan should really depend on your own circumstances.  It is the same with buying a house.  What are your opportunity costs?  What would you do with the money if you didn’t contribute?

If you own a side business, perhaps it would make more sense to take that extra money and put it into advertising or product development. If your side business takes off, that will probably give you a far better return than any mutual fund.

In conclusion, I wouldn’t dismiss several of Altucher’s arguments against 401k plans.  I think it depends on each person, but just be sure to consider the opportunity costs.  Once you lock up that money, it may be a while before you can get your hands on it again.