Originally Posted by
NuGuy
Even without adding in state income tax, you're looking at a 40% haircut for DPSP cash. To just get BACK to zero, it takes a 67% return. Average S&P returns over the past 20 years is about 8.5%, slightly higher over 40 years (not inflation adjusted). Let's be wild and assume the S&P returns 10% a year, which, honestly, will be on the high side. To recover the money you lost day 1, to get the 67% return, you would need 6 years just to get back to zero. And that's completely ignoring 1) The returns you have have gotten on the full amount and 2) Any capital gains you would have suffered on your S&P strategy.
And this isn't a day one math exercise. Every single year you're taking a 40% loss on your DPSP cash, which means that recovery is always rolling out 6 years in front of you. Time it wrong, and it could be much longer. And if you are in a high tax state, it's even worse. Yes, it's a conservative investment, but I assume everyone has those to at least a small degree, and it would allow you to shift whatever percentage that's there to a more aggressive plan. PLUS it would be in place if there are any future, unforeseen tax increases.
MBCBP is tax DEFERRED not TAX FREE. A proper comparison would include the after tax values of the MBCBP. Your MBCBP takes a 40% haircut after years of underperforming the market. Paying income tax and then investing in assets that produce long term capital gains with market rates of return will outperform a tax deferred account paying a hypothetical 5% return.
One sensible argument for MBCBP is simply as a short/medium store of cash near retirement where you can defer taxes for a couple years. If long term tax avoidance or deferral is your goal, get educated on other options vs imprisoning other pilot's money in an underperforming account. Not everyone needs or wants to load every penny into retirement accounts.
A significant item being overlooked is the downside of confiscating money rather than having it available to spend. Maybe I want DPSP Cash for kid's college, grandson's preschool or my new car.