Originally Posted by
TED74
I’d be interested to hear more about this. Why the disdain?
My finance guy can’t wait for me to have this thing up and running to shield more money from income tax since we’re about out of options. Sure, the risk/return profile isn’t what I’d want for my whole nest egg, but the MBCBP money will only make up a tiny fraction of the whole and can be offset elsewhere to keep an appropriate diversification profile. ~40% tax deferral on state and federal sounds pretty good to me on money that would otherwise be getting hit broadside at the highest rate.
What am I missing?
Crewdawg and others have said some of this already but here is my take.
Right now you get to keep your DC overages and do whatever you want with them. You can save for retirement in any number of individual vehicles, you set it aside for your kids college expenses, you can spend it as regular income. Nobody can take it away from you. The argument in favor of the MBCBP is that it is a better retirement savings option than anything that you can do on your own. The R&I committee went to great lengths with communications saying that the MBCBP was far and away better than taking the money yourself. The initial comms were at best lacking details, and at worst intentionally misleading about the true impact of income taxes on DC overages. The MBCBP as initially proposed was like a VEBA on steroids. It took everyone's DPSP cash and put it in an account that you had no control over with a targeted 3% growth rate. It would have effectively ended the option for pilots to do the mega backdoor Roth in January/February each year. In response to this they started pushing the MBCBP as an "optional" plan. To be clear, nobody has any knowledge of the treasury department approving a MBCBP or other VEBA that is optional on an individual basis.
The tax implications were discussed in detail in other threads, but IMO, the answer to whether the MBCBP is better than taking your overages is maybe. It depends on your timeframe, the as yet unknown plan terms, your personal financial priorities, and what other options you are comfortable with. I'm sure that the active real estate investors here will do much better taking the money than the MBCBP possibly could. Personally, after I max out my 401k my next financial priority is college expenses for my kids. In the end, the goal of tax deferral may or may not be a benefit. Rates could go up, possibly significantly. If you retire with a significant traditional 401k, your RMDs in retirement could put you in the same tax bracket you were in while working.
Also, while there is a reduced risk of underfunding the MBCBP, there is still a risk. And that risk will increase if we as a group demand a higher targeted rate of return. You don't own any of the money in the plan, it is grouped together, invested and then distributed to participants when they separate. You are given a "nominal" balance to make you feel like its just like your 401k.
To be clear, I support the inclusion of the plan as an option. I think it will work well for many of us. If it resembles what was initially proposed I will likely participate in the last 10-15 years of my career. But for now, if it's not optional its essentially a "tax" that takes my DPSP cash away and does very little with it in return.