Austin Dean calls dedicated retirement accounts like 401(k) plans and IRAs “money prisons.”Habergmann/Getty Images
Austin Dean advises his high-net-worth clients to avoid 401(k) “money jail.”
He recommends alternatives to building wealth that offer more flexibility and control.
The advice he provides clients enables them to obtain cash quickly without having to sell investments and incur capital gains tax.
When Austin Dean earned his various financial advisor certifications, he wasn’t entirely satisfied with the lessons surrounding conventional wisdom, especially the advice to maximize retirement accounts.
He was in his early 20s at the time and was personally interested in the financial independence movement. The idea of ”locking” your savings in an account that you can’t access until age 59 1/2 is unappealing.
“I thought, ‘There’s got to be a better way. I don’t want to wait until I’m 60 to feel like I have the financial flexibility to do the things I want to do,'” the founder and CEO of Waystone Advisors, an RIA firm that specializes in helping people achieve financial independence in non-traditional ways, told Business Insider.
He started digging into what the top 1% did—their strategies were completely different.
“The wealthiest people didn’t get there by maxing out their 401(k)s and making coffee at home,” said Dean, who holds ChFC, CLU, CFP and RICP designations. “They started businesses, bought businesses, invested in real estate, prioritized cash flow, they became banks.”
Dean calls dedicated retirement accounts like 401(k) plans and IRAs “money prisons.” They are excellent savings vehicles with strong tax advantages, but you generally cannot access contributions without paying a 10% fee until you are 59 ½ years old. This rule was put in place to encourage individuals to invest their retirement savings rather than investing it for short-term goals.
Another consequence of maxing out tax-deferred retirement accounts may come a few years later, when you must start taking withdrawals from these accounts in your 70s — the IRS calls these minimum distributions (RMDs), and they are calculated based on your account balance and life expectancy. If you don’t start taking an RMD, you may be subject to a 25% penalty.
“The IRS very reasonably said, ‘We haven’t gotten our share yet,’ and you need to start withdrawing that money,” he explained. However, if you’re financially savvy and have established an income stream that provides enough cash flow to live without the need for retirement account funds, then you “unfortunately end up in a situation where you have to take that money out anyway and then pay taxes on it. Retirement accounts take away control from us and put it in the hands of the IRS.”
Dean is not opposed to saving for retirement; he just encourages people to save for retirement. He simply believed there was a more efficient way to save that would give investors, especially those interested in retiring early, more control and flexibility.
Austin Dean is the founder and CEO of Waystone Advisors.Courtesy of Austin Dean
The non-traditional solution he offers clients is to obtain a securities-backed line of credit (SBLOC). In this type of loan, investors use their stock portfolios or other assets, including art and luxury yachts, as collateral. It allows quick access to cash without having to sell investments and trigger capital gains taxes, which investors can then inject into other investments, such as starting a business or buying real estate.
“Right now, your money is doing two things at once: It’s in the market, and it’s being used in other wealth-building vehicles,” Dean said.
The main risk is withdrawing too much money and a stock market crash, he explains: “We recommend always leaving a buffer between approved funds and funds being used. I also recommend stockpiling other liquid assets or lines of credit in case there are unexpected moves in the market. But if someone has appropriately diversified accounts, leaves a 20% cushion on credit lines, and has other assets that are flexible and uncorrelated, they should be able to withstand meaningful market moves.”
SBLOCs are popular among high net worth individuals. For example, Elon Musk “used the credits of his Tesla stock to buy Twitter and create X,” Dean explained.
However, individuals with five-figure savings can also benefit, he said: “If someone only has $50,000 to $60,000 in an investment account, we can help them set up a security-backed credit line of $35,000 to $40,000. They can then use that to purchase their first rental property.”
Even if you can afford to use an SBLOC, this strategy may not be right for you, he adds: “First and foremost, figure out what your goals are. If your goal is to have a large sum of money in a retirement account by age 60 or 65, then go ahead and do that.”
He also noted that he would not advise clients who already have significant savings in retirement accounts to liquidate and incur penalties. But if they want to achieve financial independence and retire early, he typically recommends lowering their contributions enough to take advantage of the 401(k) match, which is essentially free money.
Another strategy he discusses with clients is funding a self-directed IRA, which allows them to invest in alternatives within the IRA.
“The younger the person is, the more likely we are to not use a self-directed IRA because we’d rather keep their money out of a ‘money prison’ and be able to do two or more things at once with an SBLOC or a well-designed whole life insurance policy,” he said. But for clients in their 50s or older who have substantial funds in retirement accounts, “a self-directed IRA is a way for them to access unique alternative investments that help diversify their assets and generate income without having to liquidate a retirement account and pay taxes and penalties.”
Dean understands that non-traditional planning is not for everyone, but wants investors to understand all of their options.
“I find the conventional wisdom that ‘you should max out your 401(k) or IRA’ to be harmful,” he said. “When people come to us and they say, ‘Well, I want financial independence,’ but then realize that all the money they’ve been trying to save, they can’t get it without giving up at least 10 percent in taxes — that’s really frustrating.”
