The Hartford Small Business Insurance knows that running a small business is a big-time commitment. So this holiday season, they're celebrating hard-working small business owners with a chance to go to I Heart Radio Jingle Ball in Miami on December 16th. Nominate yourself or another small business owner for a chance to win a trip for two.

Includes airfare, two-night hotel, tickets to the show, plus $1,000 in spending cash. For official rules and entry information, visit IHeartRadio.com/SmallBusiness. Today we do Friday Q&A and I've got at least four questions lined up. Number one, are the tax loss harvesting benefits touted widely by robo-advisors worth it? Number two, an email from a listener regarding how they hacked the child labor laws.

Number three, what about the accredited investor system? What's up with that? And number four, is a 401(k) the most efficient way to build wealth? Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. This is episode 205 of the show. I think it's going to be a good one.

We've got a little bit of technical stuff. Got some legislative stuff. And we've got some wealth building stuff. Does it get any better than that? I love answering these questions. These are all patron questions. Thank you to each of you who supports the show. And thank you for sending in your questions.

I love doing this. I'm going to kick it off today with a question on tax loss harvesting. This is a big deal these days and it has some benefits that are widely touted among various people, especially all over online as far as all the advertisements that you see. Here's the original question.

It says, "Hey there, Joshua. I've got a question that might be worth considering for a future show. I'm a Patreon supporter, by the way. Thank you. Does tax loss harvesting really offer the kind of benefit that companies like Wealthfront, Betterment, Personal Capital, and others claim? And can a person do it on their own without relying on a firm to do it for them?

Thanks for the help." Good question. Tax loss harvesting has a long history. As a useful strategy. But the answer is not simple or clear cut no matter how these companies would like to portray it. Let's start with a little bit of history. These companies that you mentioned, Wealthfront, Betterment, and Personal Capital, they're all slightly different from each other.

But Wealthfront and Betterment especially fall in under what is commonly called robo-advisors these days. And the idea is how can we replace an individual professional financial advisor with an algorithm, with a computer algorithm. And financial advisors are only one of many industries, many people who are facing this threat, the threat of automation.

And many of you are facing the same thing or will be facing the same thing. If you're not thinking about how automation is going to affect your own job and your own career in the future, you really need to be thinking about that. Wake up if you haven't considered that.

Wake up. Pay attention. Because we are destined for the next couple of decades of massive, massive change. Remember, the compound effect works in many different places. It works in our own individual income and our own individual investing. But it also works with Moore's Law and its impact on computing power.

And it's very hard. It seems very slow at the beginning. But once you get into the part of the compound effect where just the growth comes, boom, boom, boom, boom, boom, boom, boom, it's hard to slow down. And we're getting there. We've been there for a while, but we're getting there faster and faster and faster.

So pay attention. But the so-called robo-advisor space has heavily influenced the professional financial advisor space for the last few years. And Wealthfront and Betterment, and again, personal capital is different, slightly different. But Wealthfront and Betterment especially have worked hard to lead this space. And one of the ways that they originally emphasized, and still today, but their initial round of advertising, their unique selling proposition was actually much stronger than it is now as far as the way that they've approached it in my observation.

One of the ways they originally emphasized was the additional performance that they could bring through their techniques. For example, Wealthfront originally with their web page, they had a great chart right across the front of it that said we could basically result in saving you several hundred basis points of performance because of our different techniques.

And right here on this tax loss harvesting idea, I'll read to you from their white paper that they published, page 15. And right from their white paper, "As the chart shows, daily tax loss harvesting shows an impressive internal rate of return over the 10-year periods with a minimum of 1.27% in the period of 2003 to 2013 and a maximum of 1.90% in the period of 2000 to 2009.

The average across the six periods is an internal rate of return of 1.55%. Interestingly, this number matches the tax alpha obtained in the no liquidation scenario of our 10-year Monte Carlo simulation, the closest match for our internal rate of return analysis above." So in essence, they used to lead with that number in their advertising materials.

They still do a little bit. But in essence, you've got them saying, "We've come out with 155 basis points of outperformance due to this tax loss harvesting technique." Betterment, in their own white paper that they published on their technique, Betterment talks about a 77 basis point increase through the use of tax loss harvesting.

They actually have an analysis on their site that talks about if you invested an amount of money, say, at $50,000 on January of 2000 and put your data in over time. So you're starting with $50,000, 70% stocks with bimonthly incrementing deposits of $750. You wind up $44,692 ahead with their portfolio with tax loss harvesting over the 13 years listed in the data.

Huge, huge difference. So you say, "Well, why would anybody not do that?" So let's talk about what actually tax loss harvesting is because the way it's often presented in sales literature doesn't lead you to necessarily understand all of the benefits. The way our tax code works is that when you have an investment and that investment creates a gain, you're going to be taxed on that gain when you sell the investment.

So because of that fact, then the quid pro quo offer from the tax code is that, well, we'll allow you to reduce your tax based on any losses that you generate. So this is one of the key ways of planning any investment solution is, well, do I have a taxable gain and then do I have a taxable loss?

Now, because of the fact that you decide when you sell and you decide largely at what price you sell, you simply choose to accept the price the market offers you for any investment, you get to time when to incur that gain or when to incur that loss. So when the income tax law was originally established back in the early part of the 20th century, investors immediately realized that they could just simply sell an investment anytime they had a loss, take the loss, and then turn around and buy the same investment again.

So soon after the passage of the income tax legislation, Congress passed rules that we call the wash sale rules, and these rules have been changed and updated as time goes on. But basically what they indicate is the fact that you cannot sell an investment for a loss and then immediately buy the same investment back again.

You have to wait at least – I think it's 30 days or 31 days for that investment to sit out there unbought and you can go ahead and buy the same investment back. So what's being done in managing a portfolio, however, in the modern world is that these computer algorithms and individual advisors can do the same thing, are looking through and saying, "How can we sell the investments that have gone down in value and then buy a slightly different investment, one that is not substantially equivalent so that we can avoid the wash sale rules but is equivalent enough to fulfill the same function in our portfolio?

And then we'll take those losses from that investment that's gone down and we'll use those to cancel out some of our taxable gains and we'll lock in our gains in the investments that have gone up. And over time, theoretically, we're going to be paying less money in income taxes." And this works, but it does have some downsides, and let's start with a few of those things I'd like to point out.

Number one, if you are selling an investment that has a loss, you need to ask yourself the question of why are you selling it. If you're selling it because it's a bad investment and it just didn't work out how you thought it was going to work out and you're going to get rid of it, well, in that situation, we're not talking about harvesting those losses by just simply buying another investment.

We're just recognizing we have a loss and we're cutting our rope short and just saying we're going to stop the loss, and that's a smart idea. That's not exactly what we're talking about here. In this scenario, what we're trying to say is we think this investment is down, but how can we sell this investment, buy something that's just about the same that'll go up in the future and then lower our other gains?

So if an investment is a bad investment, you should just simply cut your losses and be done with it. You might want to do that at an intelligent time, but you should just simply cut your losses and be done with it. And that is something that all of us can do.

And frankly, it's something that probably all of us need to do more than we do. We should cut losses in many areas. It goes back to the discussion of sunk costs and the sunk cost fallacy. If you've got losses in something and something just simply isn't working out, quit.

Move. If an investment isn't working out, sell it. If your career is not working out, change. If you need to make changes, make them. Ignore the sunk costs, make an intelligent way out of it, and cut your losses. Sometimes, at least when I talk to seasoned investors, they often say that's one of the major skills of investing, is not staying overly committed for too long of a period of time to a course of action that doesn't seem to be working out.

So recognize that clearly. But in this situation, you're not making that decision. You're basically saying, "How can I sell one investment and buy basically the same investment, slightly different, just so I don't violate the watch sale rules?" But I still think this investment is a good thing to hold in my overall portfolio.

I'm going to start with a couple of points. The first article that I'm going to link to in the show notes is an article from Michael Kitsis' blog. It's on this very topic. It's entitled "Evaluating the Tax Deferral and Tax Bracket Arbitrage Benefits of Tax Loss Harvesting." I'm going to use the examples from his article so that you can, as detailed notes, go back and read his article and refresh yourself on these comments.

But the very first thing that you have to point out is that when you sell an investment for a loss and then buy it again, you're not necessarily avoiding the taxation. You're simply deferring the taxation. Remember that we only have three basic tax planning strategies that I'm aware of.

They are timing strategies, shifting strategies, and conversion strategies. Timing strategies is where we either defer income to a later date or accelerate income for today that we could take at a later date in order to pay the least amount of tax on it. Or we defer or accelerate deductions that we could take today or take later in order to maximize the tax savings with those deductions.

Those are all timing strategies. The second is shifting strategies where we're shifting income from a high-rate taxpayer to a low-rate taxpayer. This might mean shifting income from parents to children or shifting income between business entities and business owners or between counties and states and countries to save on tax.

And we have conversion strategies where we're converting income from a high-tax-rate activity to a low-tax-rate activity. A simple example, we're converting wages over to dividends or we're converting individual personal expenses over into business expenses or investment expenses, something like that. Timing, shifting, conversion. Tax-loss harvesting is a timing strategy.

So, essentially, the major point that's often lost is the fact that when you harvest losses, you are not actually – and then you buy the same investment back. You're not actually avoiding the tax. You're just simply deferring the tax. I'm going to read here from Michael's article. "Since the essence of tax-loss harvesting is to create a deductible loss for tax purposes to generate tax savings, the easiest way to measure the benefits of the strategy is simply to measure how much in taxes is actually saved relative to the investment.

For instance, if an investment was originally purchased for $20,000 but is now down to $14,000, a big 30% decline, then harvesting the loss generates a $6,000 capital loss, which in turn, assuming there are capital gains to offset it against, will produce a $900 tax savings at a 15% long-term capital gains tax rate.

Relative to the investment value of $14,000, this means harvesting the capital loss generated a whopping tax alpha of $900 over $14,000, which equals 6.4% of savings. However, the reality is that harvesting the loss did not really increase the investor's wealth by $900 of tax savings in the long run.

The reason is that while the harvested loss did generate $900 of current tax savings, the act of harvesting the loss also reduces the cost basis of the investment. By selling the investment at $14,000 to harvest the capital loss and then reinvesting the $14,000 of proceeds, the new cost basis going forward will be $14,000, which means if or when the investment eventually recovers back to its original $20,000, the investor will face a future recovery gain of $6,000 and a negative tax alpha in the year of liquidation.

In fact, if that capital gain in turn results in a $900 tax bill, assuming the same 15% long-term capital gains tax rate, the net value of the transaction is actually the exact same as would have occurred if the loss was never harvested in the first place. So the point is, if you take the loss and then reinvest it and your investment recovers, you're going to pay the tax on the gain in the future.

Now, it's not quite exactly equal because, as Kitsis goes on in his article to point out, you do get the benefit of investing the tax saved, the dollars that you would have had to pay in tax. So if you had the opportunity, instead of paying the $900 of tax, you could go ahead and use and invest and grow that $900.

You do get an economic benefit there. So in essence, even though you don't actually produce any net tax savings, you have the equivalent of getting an interest-free loan from the federal government to use for, depending on how long you do it, a potentially long period of tax deferral. So how much is the benefit of that?

Well, it depends on what you can actually invest the money for. How much interest can you gain on the money? That's a major point that most people don't talk about. And there is an economic benefit there, but it may or may not be substantial. The next thing is to recognize that because this is a timing strategy, taxes will be due at some point in the future.

And so the question is, under which tax rates will you be at the time that you realize the gain or realize the future gain? So, for example, if you are in a high tax rate now and you're going to be in a lower tax rate in the future, then yes, it adds an additional benefit to going ahead and harvesting the loss now.

But if you're in a low tax rate now and you're going to be in a higher tax rate in the future, then you've made the wrong plan. There are scenarios under which you could realistically be in both of those scenarios. There are a number of other factors that will also affect this situation.

Namely, what's the actual nature of the investments that you're using? How volatile are they? When do those losses and gains occur? And that will change as time goes by. So in summary, I'll just read Kitsa's final article of his – or paragraph of his article, and I have no reason to disagree with him at this point.

He says this. "The bottom line, though, is simply this. Tax loss harvesting does have some economic benefit over time, although it's not driven by the outright savings, which is typically measured by tax alpha, but instead by the economic value of tax deferral, which leads to modest but non-trivial economic benefits over time.

For those who may experience tax bracket changes, the benefits can be significantly amplified, for better or worse, and in fact the impact of tax bracket arbitrage can be many times more significant than the underlying benefits of tax deferral itself. As a result, it's crucial to focus not just on the tax deferral value of loss harvesting, but also the potential tax bracket impacts, and to the extent any anticipated tax bracket changes are favorable, and there are gains to offset with the losses in the first place, harvest as much as possible, maximizing the opportunity for each contribution, each investment or asset class being held, and by checking for loss harvesting opportunities as often as possible." In my mind, that's as good of a summary as anything as far as the overall technique.

Each of us should, whenever possible, be harvesting the losses that we might have in a portfolio. It's a time-proven, sound financial and investment management technique. Now, that doesn't answer the question regarding Wealthfront, Betterment, Personal Capital, and the tax loss harvesting services that they advertise. My answer to this question is twofold.

Number one, with the actual technical analysis of this, I'm going to put a series of papers and a series of articles in the show notes for today. Start with reading the Wealthfront white paper about tax loss harvesting. Next, read the Betterment white paper about tax loss harvesting. Then, read the article entitled "The Tax Harvesting Mirage." This is an article by a man named Michael Edesses, maybe.

Michael Edesses, a mathematician and economist, is a visiting fellow with the Center for Systems Informatics Engineering at City University of Hong Kong, a principal and chief strategist of compendium finance and a research associate at Ed Heck Risk Institute. In 2007, he authored a book about the investment services industry titled "The Big Investment Lie" published by Barrett Kohler.

His new book, "The Three Simple Rules of Investing," co-authored with Kwok Tsui, Carol Fabry, and George Peacock, has just been published by Barrett Kohler. I'll read you the introduction of this article by Michael. He says, "As passive investments have gained at a rapid pace in recent years over active investment management, many investment advisors are turning toward other sources of alpha, market-beating performance, to justify their fees.

One of these sources is the rebalancing bonus, which I've previously shown to be a phantom. More recently, some advisors have been competing to show that their tax-loss-harvesting strategies produce a substantial tax alpha. While this source of alpha is not wholly mythical, its benefits are vastly overstated. Indeed, they may be negligible." That's his introduction to the article.

In the article, he goes over his methodology, and the key point here is on page four. To summarize, in the case of unequal portfolio expectations, the average annual tax alpha for daily loss monitoring was 14 basis points, but it created incremental portfolio turnover of 19%. In the case of equal portfolio expectations, the tax alpha for daily loss monitoring was 17 basis points and created incremental portfolio turnover of 20%.

So when you compare 14 basis points or 17 basis points from his study to 113 basis points from Wealthfront and 77 basis points from Betterment, you get quite a different story. Now, Betterment representatives Daniel Egan and Boris Kentov replied with a follow-up article. Daniel Egan is the director of behavioral finance and investing at Betterment, and Boris Kentov is operations manager and legal counsel at Betterment.

They replied with their own article, casting doubt on the article by Michael Edesis, and then he replied with his own article in rebuttal, answering their points and saying – and basically emphasizing that they had not answered his fundamental points. The reason I go through that is just simply to demonstrate that this is actually hotly contested.

In fact, Michael Kitsis on his blog some time ago had written a highly critical post, a very long post, questioning the calculations and assumptions in the Wealthfront white paper. Anyway, it was a scuffuffle online, one of these silly online scuffuffles. My point is that it is a contested issue.

Personally, I'm not qualified to know which is right and which is wrong. I don't have the background to actually go through and understand exactly all of the data. I don't have the rigorous training nor even the patience to sit down and do it. I would need to do a lot of homework to brush up my skills in that area to give a specific opinion that I could carefully calculate and demonstrate my own opinion on it.

I encourage you to read through these articles and to search online for other discussion of it. I'm in the middle on this. I don't particularly buy the data presented by Wealthfront and Betterment. I don't believe that they're – although I believe that their alpha is calculated according to the methodology of their papers, I don't think they're lying with that.

I don't think that for the real investor, the major benefit is there as much as it has expressed. And here is the key that I'd like to point out and bring it to a practical conclusion. Reading from Wealthfront's white paper, they're talking about the assumptions. From page five, reading a quote, "Wherever possible, we use assumptions for our analyses that are based on the actual observed behavior of Wealthfront clients since we launched our daily tax loss harvesting service in October 2012.

We believe this approach most fairly portrays the expected value to the client who is likely to use our service. Our critical assumptions are" – pay careful attention – "client age 37." This is the median age of our tax loss harvesting clients. "Marital status, married." The majority of our clients are married.

"Annual income, $260,000, the average joint income reported by our tax loss harvesting clients. State of residence, California. The most popular state of residence for our tax loss harvesting clients. Residents of high state income tax states represent the vast majority of our tax loss harvesting clients. Combined federal and state short-term capital gain tax rate, 42.7%.

Marginal tax rate for married California clients with an average annual income of $260,000 is a 33% federal tax rate plus a 3.8% additional tax on net investment income for those earning above $200,000." That's the Affordable Care Act tax. "Plus 9.3% California tax rate, the anticipated deduction of California state taxes for federal taxes.

Combined federal and state long-term capital gain tax rate, 24.7%. The marginal tax rate for married California clients with an average annual income of $260,000 is a 15% federal tax rate plus a 3.8% additional tax on net investment income for those earning above $200,000." Which is the Affordable Care Act tax.

"Plus 9.3% California tax rate, the anticipated deduction of California state taxes for federal taxes. Portfolio risk level 7, the average risk score on a scale of 0 to 10 for our tax loss harvesting clients. A risk level 7 portfolio would be allocated across six asset classes as follows." And they go into the different asset classes.

"Investment cash flows, an initial deposit of $100,000 followed by add-on deposits of $10,000 each quarter. The average wealth front tax loss harvesting client actually adds an average of nearly 20% of her original deposit each quarter. See the chart below." In my mind, the key variable is the tax rate.

Wealthfront's white paper makes the assumption for their data that the tax rates are for California investors in the highest income tax bracket. It comes out to be 56.7% for income and short-term capital gains and 37.1% for long-term capital gains. So that is about the highest possible number to put on it.

Now Betterment doesn't use that highest tax rate bracket in their white paper. They use a lower tax rate. But for me, that's one of the key scenarios. And it's interesting because Wealthfront actually – they were very popular among kind of the California techie crowd. That's their corporate culture is the California techie.

At least that was how they started. I don't know what their client makeup is now. They're saying here in their white paper that this is their median client. Maybe it is. But if you have a very high income, then you'll probably have a higher benefit here maybe especially if you have a lower income in the future when you actually realize the gain.

The other side practically speaking is this is only applicable to non-qualified accounts, non-tax-deferred accounts. This is not applicable to most Americans. Now, I recognize of course that you, the listening audience to this show, are probably not representative of the average of US Americans. But always looking at the average population, the majority of people, number one, have no savings and have no investments.

Number two, if they do have savings or they do have investments, they're primarily going to be invested through some sort of IRA or 401(k) or pension plan at work. So the number of Americans that have savings, that have investments and that invest in non-qualified accounts like this and are going to use an indexing strategy is a very small percentage of the population.

And of that small percentage of the population, I'm still not convinced that necessarily this type of investing approach is the most effective investing approach. If you had a large sum of money, this could be an excellent approach if you're looking for a passive investment strategy that's optimized in many ways.

And to me, that's the market. So in my mind, there is a legitimate benefit. Is it substantial or is it moderate? I don't know. My gut says it's moderate. I don't know. I can't prove that statement. That's just my current gut feeling. Take it for what it's worth. You read the papers.

Read other associated papers and see what you think. For the average person, I'm simply not that worried about it. I don't believe – I'm also convinced of – it's funny. I mentioned Kitsis a bunch today. I agree with him on his perspective here. I'm not convinced that the robo-advisor is the advisor of the future.

I think the robo-advisor – and this is the transition that I see most of them making – is an appropriate back-office solution for the up-front financial planner. If you have a financial planner and that financial planner is simply using advisors, robo-advisors like this to be able to provide just portfolio management services, in my mind, that's the best scenario.

I don't know. I'd be surprised if the IRS doesn't change some of these rules in the future. Right now, it's very thin. I haven't heard any scuttlebutt of them necessarily going after this, but it's very thin when you're trading out one ETF for another ETF that's theoretically different. But practically, when you actually look at the investments held within it, it's exactly the same.

I won't go into that. But that's my answer. It's a good question. I think it could have some benefit. But remember, it's only going to have benefit to you if you, number one, are investing in taxable accounts. Number two, it's going to have benefit to you the most if you're in a high-income tax bracket now and you're going to be in a lower-income tax bracket later.

Those are the key things. In that case, I think they have a good offering, and we'll see. As the academic case develops, the academics are always behind as far as the analysis. The academics are always behind the marketers. So we'll see what happens with the marketing as time goes on.

Next question comes from Neil. He says, "Joshua, I thought you should know something I recently found out. California child labor laws no longer apply once you've graduated from high school. In addition, California has a method to graduate by exam similar to a GED, but GEDs are only available to those 18 or older.

The high school proficiency exam, which is easy, can be taken by anyone who is 16 or older or who has completed 10th grade or will have completed 10th grade by the end of the academic year in which they take the test. My son, who is 15 and a half and in 10th grade, took the exam and passed it.

Nothing prevents him from continuing on in high school, but he's no longer subject to child labor laws. He's seriously considering switching to community college in September, doing that for two years, and then transferring to a University of California campus to finish off his college. That would get him a solid degree by the time he's 19.

During that entire time, he'd be eligible to work whatever hours he wants. Another option we're considering is self-study. With my help, I used to be a computer science professor, taking a bunch of AP exams and entering UC at age 18 with at least one year and possibly more of credits.

Thought you might be interested, Neil." Neil, I'm definitely interested. That's a neat contribution, and I love hearing about it. I had previously read the child labor laws here in Florida, but I went back and read them again after getting this email, and I found out that we have exactly the same exemption here in Florida.

I had just gone through it quickly, and I hadn't even noticed it. But here from my state's site on child labor laws, exemptions. "Minors are exempt from the hour limitations of the child labor law if they have been married, graduated from an accredited high school, or hold a high school equivalency diploma, served in the military, have been authorized by a court order, or been issued a partial waiver by the public school or the child labor program." So we have a similar exemption here in Florida.

I believe from the way that's stated, although I'd be interested for someone more knowledgeable than me to weigh in. I believe that only applies to the hour limitations. I don't think it applies to the prohibited occupations. It just simply applies to the hours of work. There are two aspects to the child labor laws, at least that I've observed.

Number one is what are the prohibited occupations, and then number two, what are the hours and work requirements? I love the approach that your son is taking, and I think that's the approach that any halfway bright senior or any halfway bright middle or high school student should be taking.

If you go back and with the exception of some of the very hard-skilled undergraduate degrees, there are – my brother has a degree in mathematics. That's definitely not high school material, but a lot of the soft degrees that so many of us have gotten and are getting, the academic requirements for these are less than what high school used to be.

It's pretty crazy when you actually come back and look at some of the rigor that high school used to be, the academic rigor versus what college is now. And even the government school system is many times promoting this. I have a friend of mine who is actually employed – excuse me, employed.

He's enrolled at a magnet school here in South Florida. It's affiliated with Florida Atlantic University, but it's a high school, and there are students in that class through the government school system are – what's the word? Concurrently, he's concurrently doing so-called high school curriculum and a college curriculum, and he expects to graduate from the school.

He's going to take another two or three semesters after the high school graduation and finish his degree by about 19. But many of his classmates are just simply going through the FAU system, and they're going to graduate with their bachelor's degree at the same time that they get their high school degree.

And so I think many people can do it and definitely investigate the AP exams and the CLEP exams. My thought is do both of those things together. There's no reason to go and take community college classes for things that you can do an AP or CLEP exam for if your son is a diligent student.

Just take the book, read a textbook, read a CLEP exam, cram course, pay the 150 bucks and go take the test and save yourself hours of boredom sitting in a college classroom in a community college. Clear out all of the nonsense courses as quickly as possible. Take a few of the courses if maybe he has difficulty with certain subject areas.

Go and take those courses at the community college where you may be able to benefit from the professor and then go ahead and get into the University of California for his last two years. That way he can focus 100 percent on classes that would be rigorous, that would be applicable to something he's actually interested in.

He doesn't have to waste his time sitting there dealing with the fluff courses. You can just CLEP out of those – quiz out with an exam pretty easily if he's a diligent student. It's cool to know about the exemption. I think practically it may have a little bit of impact, which is why I wanted to share it with the audience.

But realistically, most of the occupations for – that are affected by child labor laws are not going to be very productive uses of time. A high school student starting in retail is a good place to start, but there are so many better places to start and put that time to better use with a better job.

In my mind, that's the best kind of bright spot with the laws. Laws are just – they're outdated and hopeless and there are millions of new opportunities available for intelligent young people to focus their efforts on. And the idea of the dead-end retail job is – market forces are changing that.

All those retail jobs which those – to which those laws have applied with large employers, that's not – that wasn't where they came from. They came from kind of the hard labor – mining is a good metaphor to use, just a good picture to hold in your mind. But those retail jobs are doomed.

Just think about Amazon's impact on bookstore clerks and the same thing across the board. Watch the trends for checkouts at stores, automated checkouts. That's just starting. But even you're seeing with the changes in minimum wage laws with the fast food franchises. Very quickly, the fast food franchises are going to be swapping out their frontline staff for machines.

And once RFID tags are ubiquitous in all products, that's exactly going to be what's happening in checkouts at stores. And instead of having to go through the work of scanning the barcode, you'll be able to just simply use the RFID tags to do the checkouts. So the market is changing.

The good news, people are waking up. It will be better in the long run, but the transition through is painful. So help your kids whether or not the minimum wage laws apply. If they can go ahead and get this exemption, hopefully that can be helpful to them. But help them think about creative solutions, how they can bring value to the marketplace.

It's not just a matter of going out and getting a job anymore. It's an exciting future because the market forces are systematically destroying the cartels that control so many markets. But it's not going to be an easy transition. Next question comes from John. He says, "Hey, Joshua. Can you weigh in with your thoughts about being an accredited investor and the legal limitations around it?

As I understand it, I do not qualify as an accredited investor. And certain investments cannot be invested in by those who are not accredited. However, apparently the rules were supposed to have changed to allow people to make investments of these kinds without the government saying that I have to make X amount or have X amount of savings.

But as I learned by listening to the podcast Startup, Episode 7 by Alex Bloomberg, these rules have changed with the JOBS Act. But the FCC has been sitting on the ruling and is way overdue for implementing it so that someone like me can invest in these previously off-limit investments without being told that we can't.

That episode of Startup really explained a lot to me because I wanted to invest a large amount with Alex after listening to the very first episode of Startup. I assumed he would be very successful because I've loved his stuff for years and he's leveraging some seriously big friends for his new venture.

But I couldn't invest in something I really thought was going to be a huge success or at least provide me with good cash flow because of these rules. I'm also curious about why these rules exist. Were they implemented to protect people from being scammed out of their money? Thanks, John.

Fun question, John. And let's start by just simply defining an accredited investor for those who are unfamiliar with it. Many countries have accredited investors. In the United States, I'll read the definition directly here from the Wikipedia page. In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least $1 million U.S.

dollars, not including the value of their primary residence, or have income of at least $200,000 each year for the last two years, or $300,000 together with their spouse if married, and have the expectation to make the same amount this year. The federal securities laws define the term accredited investor in Rule 501 of Regulation D and as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act as, one, a bank, insurance company, registered investment company, business development company, or small business investment company.

Two, an employee benefit plan within the meaning of the Employee Retirement Income Security Act, ERISA. If a bank, insurance company, or registered investment advisor makes the investment decisions, or if the plan has total assets in excess of $5 million. Three, a charitable organization, corporation, or partnership with assets exceeding $5 million.

Four, a director, executive officer, or general partner of the company selling the securities. Five, a business in which all of the equity owners are accredited investors. Six, a natural person who has individual net worth or joint worth with the person's spouse that exceeds $1 million at the time of the purchase, or has assets under management of $1 million or above, excluding the value of their primary residence.

Seven, a natural person with income exceeding $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year. Or eight, a trust with assets in excess of $5 million not formed to acquire the securities offered whose purchases a sophisticated person makes.

So basically, you have to have some money, and you either have to have some money saved or you have to be making some money of an income high enough to where theoretically you should be relatively sophisticated. When I was taught about the accredited investor rules in going through the process of becoming an investment advisor, I was taught about it from the perspective of the sophistication of the investor.

The idea is you might be investing in companies or investment opportunities that perhaps are not as liquid as many people would be accustomed to. You might be investing with – into opportunities that have very high potential returns but also very high potential risks of loss, of complete loss. There are many aspects to the types of investments that are restricted to accredited investors that could result in your portfolio really being destroyed.

There are a lot of risks to it. And so I understand that idea and that rationale behind these rules. Just a simple thing like the lockup periods that most hedge funds operate under where once you purchase the investment, you're not able to take your money out of the fund for a certain period of time.

It would be a little bit uncomfortable if the everyday person, Joe Sixpack so to speak, just had a little bit of savings, had $10,000 of life savings and went out and plunked his money into the latest hedge fund that was offered to him. That would be a little bit concerning to me.

So I understand that rationale. Indeed, many of the laws that affect the securities markets, the investment markets, they all have the same general idea behind them. You go back to the Securities Acts of 1933, 1934. A lot of that effort with legislation was designed to protect the general public from abusive practices.

So from that perspective, the accredited investor laws make sense to me. Now, here's the problem. I have to believe that politicians are passing laws and that they're passing the laws in some ways altruistically. So there is a flipside, and I'll read a few paragraphs from an essay here that's on this exact – on this exact subject.

Regarding the question of accredited investors, this is one author's perspective. "The free market does not let people get above-return investments for long. Others spot an opportunity. They invest in it. The flow of capital raises the prices of production goods required to take advantage of the market. The rate of return falls.

Then the new competitors bid against each other to sell the products. Retail prices fall. The rate of return falls. Whenever this process fails to narrow the spread between cost and price, there is either ignorance or coercion. When the government is involved, it is coercion. The rich want to get richer.

They face a problem. Pooled funds allow the little people to enter an investment market that has a high return. Pools of capital let the little investors enter a field. To keep this from happening, the rich lobbied Congress to set up rules against non-rich people entering high-return capital markets. Only the rich may enter.

These are called accredited investors. The law was justified by protecting little investors who cannot afford these high-risk investments. The Securities and Exchange Commission enforces the law, but they're an outfit that can't even balance their own books." And there's a link to a pretty damning article back from the New York Times back in 2011, where the title of the article is "The SEC Hurt by a Disarray in Its Books," and the initial paragraphs read this.

"Washington, if a company's financial reporting were so bad that its auditor had pointed out significant weaknesses in its accounting for seven years running, the Securities and Exchange Commission would most likely be all over it. But what if the company were the SEC itself? Since the Commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year.

Last November, the GAO said the Commission's books were in such disarray that it had failed at some of the agency's most fundamental tasks, accurately tracking income from fines, filing fees, and the return of ill-gotten profits." "A reasonable possibility exists that a material misstatement of the SEC's financial statements would not be prevented or detected and corrected on a timely basis," the auditor concluded.

"The auditor did not accuse the SEC of cooking its books, and the mistakes were corrected before its latest financial statements were completed. But the fact that basic accounting continually bedevils the agency responsible for guaranteeing the soundness of American financial markets could prove especially awkward, just as the SEC is saying it desperately needs money to increase its regulatory power." So if you're trying to decide which of these versions of the story is the truth, obviously we would need some evidence.

And in my mind, there are a couple of potential arguments, and so that you know where I'm going, I don't know the answer to which it is. I think it's a legitimate question, but I'm not convinced that it's one or the other. I think it's probably a combination of both of these factors, a little bit of protection of the general public and a little bit or maybe a lot of protection of the wealthy.

Let's start with an argument about the practical effects of accredited investor laws and just simply ask, "Are they working and are they a good standard?" Here I'm going to read an excerpt from a PDF from a Boston University paper by So-Yeon Lee called "Why the Accredited Investor Standard Fails the Average Investor" from 2011-2012.

Let's start with the first two paragraphs of the introduction. "The rich get richer is a timeless truth. While this may be self-evident, some of the reasons why the rich seem to get richer are less apparent. Surprisingly, U.S. securities regulations award special investment privileges to the already affluent, resulting in a legal system that makes it even easier for them to amass wealth.

Private placements operate as one such privilege. Because most investment decisions are executed in a public marketplace, rules that govern securities market transactions can directly impact an investor's earning capacity. By placing limitations on who can invest in private placements, regulators seek to protect investors in the amount of risk they can undertake.

Risk and return, however, are incontrovertibly linked. If one investor is able to take advantage of investment opportunities that are unavailable to others, he or she may potentially earn larger returns. Consequently, the government's placement of regulatory limits on an investor's potential risks also limits that investor's potential returns." So we have a clear agreement, so to speak, that markets are being protected and those markets are likely to have higher potential returns.

So the historic definition is talking about sophisticated investors who can fend for themselves and who can look out for their own – look out for their own needs. But I think the author of this piece makes a good point here and in a section entitled "Are Accredited Investors Necessarily More Sophisticated?" he writes this.

"Recent criticisms of the private placement exemption focus heavily on the idea that wealthy, individual, accredited investors should receive full protection under US securities regulations because they are not necessarily capable of fending for themselves. The dominant narrative offered as an explanation for the Great Recession of 2008, that investors took risks that they did not understand and that they were inadequately compensated for these risks, supports this view as well.

As a result, many have advanced arguments for a reformation of our financial laws and regulations in favor of increased regulatory oversight. As individual investors' level of wealth does not necessarily share a positive correlation with his or her investment expertise because wealth may be obtained in a number of ways that require no investment knowledge, for instance, by inheritance.

Thus, investors meeting the monetary qualifications set forth in the definition of accredited investor are not necessarily more sophisticated than retail investors. At least for natural persons, having a certain net worth or a certain level of income does not imply an ability to obtain and evaluate issuer disclosures related to a particular security.

The justification behind allowing wealthy and potentially unsophisticated investors who can afford to lose money to invest in mispriced securities is that this exception encourages capital formation. By using private placements to issue securities to accredited investors, issuers are able to make efficient use of capital to build their businesses. This is partly due to the fact that issuing private placements reduces the transaction cost involved in obtaining money from capital markets since the issuers can avoid costly regulation.

On the other hand, by defining accredited investors as individuals who meet certain net worth or income requirements, U.S. securities regulations limit the potential pool of investors in private placements to individuals who are deemed wealthy enough to take on higher levels of investment risk than non-accredited investors. Consequently, the current securities regulations balance the need for efficient capital formation against the desire to limit risks undertaken by investors.

In sum, accredited investors are not necessarily more sophisticated than non-accredited investors. However, accredited investors are allowed to take higher amounts of investment risk in favor of efficient capital formation. The author goes on with an argument on why the current accredited investor standard is less effective. In my mind, this argument and arguments along this line would be a much more effective way of actually handling the risk that an investor faces if that's the primary goal of the legislation.

In light of the above, neither net worth nor adjusted gross income are necessarily good indicators of whether a certain individual is better suited to take bigger investment risks and to absorb financial losses than another individual with a lower net worth or lower income level. Net worth is the sum of all of an individual's liquid and non-liquid assets minus liabilities.

Assets can be broken up into three parts, large assets, personal items, and assets that are liquid. Examples of large assets include real property and cars. Personal items, on the other hand, can consist of items like jewelry, stamp collections, and musical instruments. Finally, liquid assets include items such as cash on hand, cash in checking or savings accounts, stocks, retirement funds, and other investments.

The sum of an individual's liquid and non-liquid assets equals his or her total asset value. Similarly, to calculate an individual's total liabilities, all of his or her liabilities must be totaled, including mortgages, car loans, student loans, and credit cards. Therefore, the net worth standard simply measures an individual's total assets minus total liabilities without regard for whether the assets are liquid or non-liquid.

Whether assets are liquid or non-liquid matters because non-liquid assets are more difficult to convert to cash than liquid assets. Therefore, high net worth investors who have insufficient liquid assets may be forced to liquefy their assets for cash. For example, if an investor uses liquid assets to make an investment and that investment fails to deliver expected returns to the investor, then that investor may have to liquefy non-liquid assets to meet his or her ongoing need for capital.

When the investor decides to convert a non-liquid asset to cash, he or she faces liquidity risk, i.e., having to sell the non-liquid asset at a significant discount in order to sell the asset quickly. The adjusted gross income standard is also ineffective in determining whether a particular investor is in a position to absorb financial losses.

Because adjusted gross income fails to consider the full extent of an individual's expenses, an investor may have sufficient adjusted gross income but may not have the requisite funds to absorb financial losses. For example, an individual who earns $200,000 annually may have annual liabilities that exceed this amount. An individual with less adjusted gross income who has proportionately lower liabilities is better positioned to absorb financial losses.

Instead, the accredited investor standard should consider whether an investor has the requisite discretionary income to risk in making investments. Discretionary income is commonly defined as an individual's adjusted gross income minus taxes and necessities, such as mortgage, utilities, and food costs, and should reflect the portion of his or her income that can be used for spending or saving.

For example, if an individual has an adjusted gross income of $100, is taxed $25, and has rent, food, transportation, and other living expenses that total $60, then he or she has a discretionary income of $15. In light of this, an investor can afford to absorb losses equal to the amount of discretionary income he or she has available.

In this scenario, issuers may voluntarily determine that it is not worth it for the organization to transact with an individual who only has a few dollars of discretionary income. However, the government has no reason to bar such financial transactions. If the issuer and the investor both elect to participate in the transaction, and the individual has the capacity to absorb potential financial losses stemming from the investment, then that investor should be allowed to take that risk and reap the potential benefits of the investment.

This may lead to better capital formation by allowing issuers to borrow from a larger pool of investors. Since net worth standards include both the liquid and illiquid assets of a particular investor, while income standards factor in his or her adjusted gross income, an investor who meets the accredited investor standard may have less discretionary income than another one who does not.

For example, if A is retired and has a net worth of $1 million, but the vast majority of A's net worth is invested in real properties, none of which A uses as a primary residence, A qualifies as an accredited investor. Or, if A is single, lives in New York City with an annual income of $200,000 and has four children, A qualifies as an accredited investor.

On the other hand, if B is single, lives in Harlingen, Texas, with an annual income of $195,000 and has no children, B does not qualify as an accredited investor. Although in each example A is an accredited investor and B is not, B is likely to have more discretionary income than A.

Furthermore, even if B only has discretionary income of $50, B should be able to invest this money as he or she pleases without unnecessary limitation. The discretionary income standard is a better financial measure of determining whether a particular investor can afford to make risky investments because it quantifies his or her capacity to absorb financial losses.

Moreover, by limiting a particular investor's total investment in private placements to the precise dollar amount of that individual's discretionary income, regulators can ensure that investors who do invest in private placements can truly bear the risks of their investments. Applying a discretionary income standard in determining whether a particular investor qualifies as an accredited investor may result in better access to capital for issuers seeking investors and increased investment opportunities for retail investors.

So there you have a critique and a recommendation by an academic saying, "Well, the law as it is doesn't work very well," and I think they make good points. If you – if the primary goal of the state is to protect the investors, I think those are good points and it should be considered.

Now, you obviously have to question and this is where your political ideology, your ideas and understanding of what's ethical and what's moral will come in. Does the state have a moral obligation to protect people from making bad investments? I have a bit of a trouble – I have a bit of trouble personally thinking that's the case and my reason for that is that most of my worst investments have to do with the state.

Social security is not such a great plan for me. I could do a little bit better on my own. Now, could most people – other people do better on their own? You can make the argument that many people depend on social security and that's where you get into a moral argument that goes into political ideology.

But I think at least it could be argued effectively that the standards are ineffective. Now, what about the other side? What about the arguments for the idea that the rich lobbied congress to pass special laws and regulations in order to protect their interests? Is there any evidence for that or is there any proof for that?

I don't have a comprehensive proof or case about what happened back when these laws were passed. I've looked into it a little bit but I haven't been able to find evidence that I've found to be compelling enough to kind of go through and say this is exactly what I believe.

If anybody knows of research with a good academic background, I'd love to know about it. But what I will do is I will read a very recent report here. I'll read four paragraphs of a very recent report on the influence of money on government. This comes from the Sunlight Foundation published November 2014.

Headline title says Fixed Fortunes. The Biggest Corporate Political Interests Spend Billions and Get Trillions. Between 2007 and 2012, 200 of America's most politically active corporations spent a combined $5.8 billion on federal lobbying and campaign contributions. A yearlong analysis by the Sunlight Foundation suggests, however, that what they gave pales compared to what those same corporations got, $4.4 trillion in federal business and support.

That figure, more than the $4.3 trillion the federal government paid the nation's 50 million Social Security recipients over the same period, is the result of an unprecedented effort to quantify the less examined side of the campaign finance equation. Do political donors get something in return for what they give?

Four years ago, the U.S. Supreme Court suggested the answer to that question was no. Corporate spending to influence federal elections would not "give rise to corruption or the appearance of corruption." The majority wrote in the landmark Citizens United vs. Federal Election Commission decision. Sunlight decided to test that premise by examining influence and its potential results on federal decision makers over six years, three before the 2010 Citizens United decision and three after.

We focus on the records of 200 for-profit corporations, all of which had active political action committees and lobbyists in the 2008, '10, and '12 election cycles, and were among the top donors to campaign committees registered with the Federal Election Commission. Their investment in politics was enormous. There were 20,500 paying lobbying clients over the six years we examined.

The 200 companies we tracked accounted for a whopping 26% of the total spent. On average, their PACs, employees, and their family members made campaign contributions to 144 members of Congress each cycle. After examining 14 million records, including data on campaign contributions, lobbying expenditures, federal budget allocations, and spending, we found that, on average, for every dollar spent on influencing politics, the nation's most politically active corporations received $760 from the government.

Did you get that? We found that, on average, for every dollar spent on influencing politics, the nation's most politically active corporations received $760 from the government. The $4.4 trillion total represents two-thirds of the $6.5 trillion that individual taxpayers paid into the federal treasury. Welcome to the world of fixed fortunes, a seemingly closed universe where the most persistent and savvy political players not so mysteriously have the ability to attract federal dollars, regardless of who is running Washington.

Lest you take offense at your political party of choice, notice this. During the six years we studied, newly elected to Democratic majorities took control in the House and Senate. Two years later, the White House shifted from Republican to Democratic control, and two years after that, the GOP came back to take the House.

The collapse of the housing bubble in 2007 led to massive bailout efforts by the Treasury Department and the Federal Reserve Board, two massive stimulus bills, and the loss of more than 8 million jobs. Congress passed laws that overhauled health care insurance and financial industry regulation. Troops surged in Afghanistan and withdrew from Iraq.

There were 16 separate continuing resolutions to fund the government, a debt ceiling standoff that caused a downgrade in the nation's credit rating and a "super committee" to wrestle with the federal budget. As middle-class Americans lost ground, the fixed Fortune 200 got what they needed. What they needed included loans that helped automakers and banks survive the recent recession while many homeowners went under.

It included full funding and expansion of federal programs started in the 1930s that, year after year, decade after decade, helped prop up prices for agribusiness and secure trade deals for our biggest manufacturers. It included budget-busting emergency measures that funneled extra dollars to everything from defense contractors to public utility companies to financial industry giants.

The record suggests that the money corporations spend on political campaigns and Washington lobbying firms is not an unwise investment. It goes on and talks about the fact that these spenders on lobbyists come from almost every industry and that essentially the government is a business partner and the money spent has a good return on investment.

And so here's the interesting challenge. Do you think that the world was different 100 years ago? I don't know. I wasn't there. I think it's a good question. But today, if I were in charge – and this is one of the things that frustrated me so much about the large corporate world – it's just simply as the – if I were running a company, I have a fiduciary responsibility to my stockholders to make sure that their value is increased.

And I got to make sure that the legislation is tilted in my favor. Now, I don't have any reason to think it wasn't similar 100 years ago. In fact, a little bit of study of history, you start looking into some things and in many ways it may have been worse.

It may have been better. I don't know. I don't trust it. So in my mind, I think that the idea that the benefit of the accredited investor rules primarily being applied to the rich, in my mind, that would be compelling. But here's the key. Changes in legislation have to have a – they have to have some sort of positive perceived benefit for the population.

Although it seems like some of the politicians are becoming much more brazen with their use of – with their use of their influence and not so worried about the reports of the press. It seems to me my observation would be that it just feels like people are becoming much more brazen.

I was recently looking through the book Clinton Cash by – I think it's Peter Schweitzer, a best-selling book on the story of Bill and Hillary Clinton. Right from the cover, it says, "In 2000, Bill and Hillary Clinton owed millions of dollars in legal debt. Since then, they've earned over $130 million.

Where did the money come from?" If you read through some of the author's evidence and follow the money that the Clintons have made off of their political connections, it's pretty damning. It's pretty damning. And then you watch – at least for me, I watch especially some of Hillary Clinton's movements and you say, "Man, she is brazen." I'm looking forward to – I think the same author and his team are writing a book on the – on George W.

Bush. I'm looking forward to reading that. But the point is that adjusting government in the direction of your own self-interest seems to be a time-honored tradition. And I'll leave it at that. I don't know anything more than that other than to say I find them to be believable. I guess the point that I was trying to flesh out was that any legislation that passes, there needs to be a perceived popular benefit.

Even though politicians are more brazen, they still are a little bit restrained by the common good. So in my mind, if I were trying to say, "How can I keep the inefficient – the best investments for myself, myself being wealthy?" I would do it exactly like the accredited investor rules.

I would say, "Well, we need to protect people. We're all about protecting people. Look at the Patriot Act. We come up with fun names for things. We have the Patriot Act. It's patriotic after all. We need to protect people from terrorism." Well, what's the net effect of it? You always have to have a positive perceived benefit for the actual goal.

I'll leave it up to you to decide. Fun question. Hopefully, that gives you at least something to think about and stimulate your thoughts. If any of you know any better research or any better academic research on the history of it, I've never seen anything good on this subject. I'm just kind of looking at the net effect and wondering about it.

Final question of the day comes from Spencer. Spencer writes this. "As a young engineer who is single, making a salary of over $80,000 in Texas with no state income tax, should I max out my 401(k) if my goal is to become very wealthy before age 40? Or should I invest some in my 401(k) and invest the rest in REITs or other more risky assets?

Of course, along the way, I'll be very frugal and live way below my means. Thank you. Love the show." Thanks, Spencer. Thank you, Spencer. First, in my answer to your question, I want to point out that you are drawing what I believe is a false comparison. You write here in your question, "Or should I max out my 401(k) if my goal is to become very wealthy before age 40?

Or should I invest some in my 401(k) and invest the rest in REITs or other more risky assets?" That's a false comparison because you can invest in REITs and depending on what you mean by more risky assets, you may be able to invest in those through your 401(k). The only limitations on what you can invest your 401(k) in is simply what does the sponsoring company offer to you as investment choices.

Generally, you're going to have a menu of mutual funds. I'm sure that you're going to at least if you're with any kind of sizable corporation at all, I'm sure you're going to have at least one REIT, real estate investment trust fund, available to you. So if you wanted to invest into REITs, that would be – you could do it in your 401(k).

I wouldn't say that REITs are necessarily more risky than other mainstream mutual funds. They're just a different asset class. They have different characteristics and they usually bring them together in a portfolio with a carefully built asset allocation with an effort of increasing the overall return and decreasing the volatility of the portfolio.

So they generally tend to be a counter cyclical investment asset to some degree. They're not perfectly correlated to say large cap stocks but they're also not perfectly – negatively correlated. They don't have a correlation of exactly minus one. It's showing that they – it would be great if they did.

It would be great if we could find two asset classes, one that were perfectly non-correlated. When one went up, the other went down. When one went down, the other always went up. Unfortunately, I don't know of those asset classes. So we put them together in different percentages to try to lower the overall risk of the portfolio.

But the point is these things are not mutually exclusive. It's not either 401(k) or these other assets. The 401(k) is not an investment. It is not possible to invest in a 401(k). A 401(k) is simply a specific account, type of account that's governed by section 401, subsection K of the internal revenue code.

There's no investment product called a 401(k). Rather, the way it works is you can invest into investment products, into a mutual fund, into a stock, into a REIT. You can invest into those through your 401(k) or within your 401(k). But the 401(k) is not an investment. So you've got to make two decisions.

You've got to, number one, make a decision of should I invest through my 401(k) and number two, what type of investment should I choose to invest in? And those are two different decisions. We usually just lump them all together, but they are indeed two different decisions. Let's start by talking about what are the reasons to invest using a 401(k) or through a 401(k) or within a 401(k), hopefully you understand the language.

What benefit do you get? Well, number one, the primary benefit of investing with a 401(k) or through a 401(k) is the ability to defer the income tax on your earned income from today to some future point in time. So if you defer $10,000 of your income, you won't pay the tax today at today's tax rates, but you will pay it when you take it out at retirement age.

That's the primary benefit. In addition to that, you'll be able to defer the taxes that will accrue on the investment gains if you have gains until you take them out. And then at that point in time, you will pay ordinary income tax on the income plus all of the gains.

The number two benefit is possibly you might get employer contributions. This is for most people the most compelling reason to invest through a 401(k) because you get an immediate increase on your money because your employer is trying to incentivize you to use the program. And so you can gain additional money by having employer contributions.

There are some other benefits, things like favorable creditor protection laws. If you have a lot of money in your 401(k) and you lost a lawsuit, at least the money in the 401(k) would not be an asset that's available for the creditors. There might be some other scenarios. So for example, the assets will pass outside of probate because of beneficiary designations.

The assets will be able to maintain their tax deferral to a certain point in time, and that could be stretched out through your beneficiaries. But most of the other benefits are just less ancillary benefits. Another benefit would be the ability to take the money out before you even see it.

So you can automate the process and pay yourself first and not have to rely on your self-discipline to fund the account. But the two primary ones that are the big deals, number one, tax deferral on the income, and then number two, possible employer contributions. All the rest of the stuff, most people don't even think about it.

So what are the problems with investing in a 401(k)? Well, the big one is that you won't be able to touch the money until 59 and a half and use it for whatever you want without paying a penalty. Now, there are a few exceptions, and we've talked about some previously.

We'll talk about more. There are a few exceptions. There are ways to get the money out. You can transfer it to an IRA. Then you can convert the money to a Roth IRA, and then you can take it out after five years. You can use some of the money for an initial down payment on a house.

You can use some of the money for education without penalties. But basically, it's good to simply just assume I can't touch the money until 59 and a half because it's a major hassle. The other problem with a 401(k) is that you're limited to the investments that are offered by the 401(k) sponsor.

So whatever the list of investments they offer you, some people it's 10 and some people it's hundreds. But whatever that list is, that's the – those are the investment opportunities you're limited to. There are some other attributes. So for example, you expose all of your savings and all of your assets to your employer.

You expose at least the assets in their 401(k) plan. You expose all of your assets and all of your savings to the government. There's a form that's filed every year with the government stating exactly how much money is in that account. There are other problems with the 401(k), but basically it comes down to the only problem is you can't touch the money until 59 and a half.

So you're primarily trying to make a guess of do I value the tax deferral and the employer contributions more than I value the flexibility and freedom with the money? Perhaps the privacy, I guess, if you were going to talk about that. That's the decision you have to make. Now, there are a lot of risks that would come in.

You have to do a market survey and try to think about it. So are there risks of changes in tax laws? If the tax rates and my own personal taxation rate is higher in the future than it is today, then I made a bad decision and I should have taken the money today.

But on the flip side, how likely is that? Maybe the tax rates are better today than they will be in the future and – or excuse me, are higher today. I'm single. I'm making $80,000 a year. In the future, I'm not going to need so much. But that's the 401(k) question.

You've got to answer that. It's not necessarily an easy question. I'm going to talk to you in a moment about what I would do. The next question you have to solve is what to invest in. That's also a difficult question because there are a lot of investment options that are available to you.

For me, I've learned and changed my thoughts on this over time largely due to exposure. When I was 18 years old and kind of just launching out and saying, "OK, I'm going to open up my IRAs and I'm going to start funding them," I was convinced that that was the way to build wealth because that was what every personal finance book said.

Put money in your IRAs and put money in your 401(k)s. But I learned something in my six years of practicing financial advisor and probably talking with I would guess maybe 1,000 people about their money. I can remember exactly one person, whoever got rich exclusively based upon long-term mutual fund investing through their retirement plan, one person.

That person was a high school teacher and they had never made a ton of money. I think their income was never more than probably $50,000. Maybe it was mid-40s. The numbers – exact numbers escape me. But they had been diligent at saving and investing for a very long period of time.

They taught economics. They enjoyed teaching. They loved the lifestyle of teaching. They were able to go in, do work that they enjoyed. They left school where I live. They went surfing every day. And I got to know this person and they were basically at the beach every single day at 4 o'clock, able to surf for a couple hours.

They just had a great lifestyle built out for themselves. They just deferred some money into their 401(k) plan, the 403(b) actually, over a long period of time and they had over a million bucks saved up in that account. Their wife was also a – this was a man. His wife was also a school teacher and they had deferred money into both of their accounts.

They had a great life set up for themselves. They retired early. They had plenty of money. They had enjoyed their lifestyle of teaching all the way through, relatively low-stress job for them. They were both good at it. They had a lot of money. They had a golden retirement and they could continue doing the things that they loved.

That is the one and only circumstance that I came across where somebody actually built wealth without having a high income and they built wealth through their tax-deferred retirement accounts. It does work. But in order for it to work, you need a long period of time. I have run across more people who had built up substantial assets in their 401(k) in excess of a million dollars.

But what I observed was that very few of them were median income people and their actual best investment had been in their business, i.e. in this situation, their business – we'll call it their income. They were professional people. They had high-paying corporate jobs and they just simply were setting aside so much money out of their high-paying corporate jobs.

It's hard not to get wealthy. If you're contributing and maxing out a 401(k) at $17,500 a year and let's say your employer is tossing five grand into it, it doesn't take you that long to have saved a half a million bucks. You only need a little bit of growth in the investment to be in excess of a million dollars.

And so I found a number of people doing that, but the key variable there was they were making $150,000, $180,000, $200,000. Beyond that, however, I just started to look around and I started to realize that the majority of people don't have much money in their 401(k). The majority of people aren't getting rich.

And even though I thought that I was telling everybody the right thing to do, I wasn't. Because when I look around my town and you should look around your town, all of a sudden I see that the people who have the most money are always the people who are operating some sort of independent business or who are very highly paid professionals, which is an independent business.

And I realized I was putting my focus on the wrong thing, which is why I sound like a broken record talking about investing in business and income because I look around my town and that's who the rich people are. And at some point I realized, wait a second. I've kind of gotten this thing backwards.

It's not that investing through a 401(k) makes you rich. It's that having a high income makes you rich and then as part of that you invest through a 401(k). That's what led to my adjustment in views. So for you, Spencer, I would simply say this. You should always invest in the most efficient way possible.

And if your investment plan of choice is something like mutual funds or REITs, other pooled investment companies like that, then probably the most efficient place for you to do that is going to be in the 401(k). It's pretty cool that you can set aside $17,500 into that account. If you were to do that – let's run some quick math here.

So 12 years from 28 to – if you said you're 28 and you're going to 40. So if you're going to do 28 to 40, put that in – do it monthly. Let's just say a 10% number compounded monthly starting with nothing, $17,500 divided by 12. That's our payment.

So at the end of 12 years, you might wind up with $406,000 in that account if you fund it at $17,500 per year ignoring an employer match and assuming a 10% rate of return. At age 40, you'd have $406,000 in that account. That's a huge number. And let me tell you how that number could grow.

So let's just say then you quit working and we have $406,000. Put that in as our present value. Then 20 years later, same 10% interest, no more payments into the account. At the age of 60, you would have $2.7 million in that 401(k). That could be a lot of money.

And having the money tucked in that account could, number one, make you very wealthy and it could be a big deal for you. But it's probably not the only thing that you should do. You should probably be doing other things. You don't have to. If like that teacher that I met, you are – you love your job.

You're very comfortable as an engineer. Nobody – there's always a balance between how much work do you want to do versus how rich do you want to be. And if you love your job and you want to do that and then 401(k) is simple and easy and go surfing every day, do that.

If you want to be very wealthy, it's probably not going to happen in the 401(k). I don't know of anybody who's very wealthy who ever says, "I made all my wealth through a 401(k)." So hopefully you can see the balance there in the answer. 401(k) can be a very efficient way to do it.

It can be a very efficient way to defer taxes. It can be a great way to accumulate wealth if you're trying to accumulate paper assets in an ongoing period of time. But it's probably not going to be the foundation of your fortune. For me, this is the great disadvantage of the 401(k) and this is what happened to me.

I put too much money in the IRAs and 401(k)s and then when I have other ideas and other opportunities to make a fortune, all the money is locked up. Now I'm working my way through that but at this point, I am less of a fan of the tax deferred accounts than I was in the past.

I've experienced the power of actually having money that's liquid that you can actually do something with. And that seems to me to be the foundation, a better foundation of a solid fortune. We'll see as time goes on. I hope you get the balance. Ultimately, it comes down to your individual situation and you are in charge of that.

It's your decision. It's your money. I can't tell you what to do with it but hopefully at least thinking about it and thinking about the pros and cons will help you to know what to do. Thank you all so much for listening. I've enjoyed answering these questions for you today.

I know a few of these have gone a little bit long but hopefully the information was helpful to you. If you'd like to get information – or excuse me, if you'd like to get a question answered on a show like this, go to RadicalPersonalFinance.com. Call it in. I didn't do voicemails today but call it in using the website or send me an MP3 file of your question.

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