Austin Dean calls retirement-specific accounts like 401(k) plans and IRAs “money prisons.”halbergman/Getty Images
Austin Dean advises his high-net-worth clients to avoid 401(k) “money jail.”
He recommends alternatives for building wealth that offer more flexibility and control.
His advice to clients allows quick access to cash without having to sell investments and trigger capital gains tax.
While Austin Dean was earning his various financial advisor certifications, he wasn’t entirely satisfied with the curriculum that revolved around conventional wisdom—especially advice to max out retirement accounts.
He was in his early 20s at the time and took a personal interest in the financial independence movement. The thought of “locking up” their savings in accounts that wouldn’t be accessible until age 59 and a half wasn’t appealing.
“I said to myself, ‘There has to be a better way. I don’t want to have 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% were doing – and their strategies were completely different.
“The richest don’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, they bought businesses, they invested in real estate, they prioritized cash flow, they became a bank.”
Dean refers to specific retirement accounts like 401(k) plans and IRAs as “money prisons.” They are great savings vehicles with strong tax advantages, but you typically can’t access your contributions without incurring a 10% tax until you reach age 59 ½. This rule is in place to encourage people to keep their retirement money invested rather than dipping into it for short-term goals.
Another consequence of maxing out tax-deferred retirement accounts can occur years later when you have to start withdrawing from them in your 70s—the IRS calls these required minimum distributions (RMDs), and they’re calculated based on your account balance and life expectancy. If you don’t start taking RMDs, you could face a 25% penalty.
“The IRS is very reasonably saying, ‘We didn’t get our share of this,’ and you have to start taking that money out,” he explained. However, if you’ve been fiscally savvy and built income streams that provide enough cash flow to live without needing the retirement account funds, you’re “unfortunately stuck in this position of having to take that money out anyway and then pay taxes on it.”
Dean doesn’t discourage saving for retirement; he just believes there is a more efficient way to save that gives investors, especially those interested in early retirement, more control and flexibility.
Austin Dean is the founder and CEO of Waystone Advisors.Courtesy of Austin Dean
The non-traditional solution they offer their clients is a security-backed line of credit (SBLOC). This is a type of loan where an investor uses their stock portfolio or other assets, including fine art and luxury yachts, as collateral. It allows quick access to cash without having to sell investments and trigger a capital gains tax – and the investor can then pump that cash into other investments, such as starting a business or buying real estate.
“Now your money is doing two things at once: it’s in the market and it’s being used for other wealth-building tools,” Dean said.
The main risk is that you take out too much money and the stock market crashes, he explained: “We recommend always leaving a buffer between what you are approved for and what is used. I also recommend having other liquid assets or lines of credit in reserve in case the market has an unexpected swing. assets, should be able to handle significant market volatility.”
SBLOCs are popular with high net worth individuals. Elon Musk, for example, “used a line of credit on his Tesla stock to buy Twitter and create X,” Dean explained.
However, people with five-figure savings can also benefit, he said: “If someone has only $50,000 to $60,000 in an investment account, we can help them set up a security-backed line of credit for about $35,000 to $40,000.
Even if you have the ability to use an SBLOC, this strategy may not be for you, he added: “First, figure out what your goals are. If your goal is to have a bunch of money in your retirement accounts at 60 or 65, then go for it.”
He also noted that he doesn’t advise clients who already have a sizable nest egg tied up in retirement accounts to liquidate and incur penalties. But if they want to achieve financial independence and retire early, he typically recommends reducing their contributions to enough to take advantage of a 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 inside the IRA.
“The younger the person, the more likely we are not to use a self-directed IRA because we prefer to have their money not in ‘money jail’ and be able to do two or more things at once with an SBLOC or a well-designed whole life policy,” he said. But for clients over 50 with a large amount of money in retirement accounts, “a self-directed IRA is a way for them to access unique alternative investments to diversify their assets and create income without having to liquidate their retirement accounts and pay taxes and penalties.”
Dean understands that non-traditional planning isn’t for everyone, but he wants investors to understand all of their options.
“I find the conventional wisdom of ‘you should max out your 401(k) or IRA’ is damaging,” he said. “When people come to us and say, ‘OK, I want financial independence,’ but then realize that all the money they’ve worked hard to save they can’t access without giving up at least 10 percent plus taxes — that can be really discouraging.”
