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Financial Questions & Answers

Financial Questions & Answers

Question:

If one were to pay the normal tax burden associated with 401k withdrawals, what would offer an effective hedge against the declining U.S. dollar? – Dan

Answer:

We’re not sure we like what you’re contemplating. First, depending on the size of your 401(k) and your overall tax situation, the cost to make a lump sum withdrawal could be dramatic. Remember, withdrawals will generally result in taxable income. Thus, a significant withdrawal would likely be reduced by 30-40 percent when you include state and federal income taxes. At that point your plan calls for move into Swiss Francs and a Swiss bank. If the dollar declines in value as compared to the Swiss currency, you could see positive results above and beyond what you’re earning on your bank deposits. This all seems very speculative and we would prefer a more basic approach: build a diversified, well-constructed portfolio that includes investments that help protect against a declining dollar. Finally, while we’re not certain about interest rates in a Swiss bank or which way the dollar will go we are certain you would appropriately report any income derived from foreign investments on your U.S. income tax return.