Are you Pro or Against 401(k)?
A recent article that I wrote on the BP blog received some criticism because I suggest that a 401(k) is one of the best ways to increase your net worth.
This strategy was criticized by a couple of readers and I thought I'd move the debate over here. So here's my argument:
A 401(k) allows you to invest and grow your net worth tax free. It reduces tax liability now, enabling you to have a huge portfolio to invest that will achieve outstanding returns for the lifetime of the account. In my opinion, this is absolutely critical and its a real shame that someone would forgo the opportunity to take advantage of this tool.
The main counterpoint to this thought process is that the funds are not available until 59.5, and that they are taxed when they are withdrawn.
What do you think? Would you rather build up a ton of net worth through the 401(k) or have less assets to manage, but make them usable sooner?
I vote for the 401(k) and increasing my total assets under my name as much and as rapidly as possible.
On the 401k, don't forget the "rule of 55" and the 72(t)...both of which allow penalty free distributions.
But, on another note...(referring to another post of mine) has anyone taken a 401k loan to purchase a property or to fund a rehab? This option is sounding good to me since all interest paid goes back into the 401k. It is like acting as your own lender.
Thanks all...
Mike & Nancy,
NestProps
@Scott Trench and I had a PM discussion about this a while back. The real problem with the match is people thinks it makes them wealthy. The data suggests otherwise.
So I didn't have time to read every response. But for those on the forum who are actively using real estate as an investment vehicle for leave their Just Over Broke (JOB) life behind, then you should stop contributing to the 401(k) if it does not allow for a loan option, even if the company matches. Put that money into an account with a company like Schwab and invest it yourself so you can get to it when needed. If it allows you to take a loan, as others have already said, then keep at it!
Once you have enough to buy an investment property using leverage, take out a 401(k) loan. Pay yourself/it back by using what you were contributing to the 401(k). Rinse and repeat. This is the strategy I am employing right now.
Will it work? I built a spreadsheet called 100K per Year using REI. It shows how reinvesting all of your REI income can lead to over $200K per year in cash flow within 30 years.
The premise? You start with zero saved. You make $50K per year and save 10%/mo toward a down payment. It takes you nine years to buy your first fourplex! Ugh. "It will never work!" is what I hear you saying. You reinvest all of the cash flow from your properties back into your plan.
After thirty years, you'll have over $200K of cash flow from your investments.
The 401(k)? It would have $2,560,000 built up, assuming a 10.689% annual return. Financial advisors often suggest taking no more than 4% of the income if you want to preserve your capital and to have a conservative portfolio earning 4-6%. Let's assume 6%.
You can only take out $153,600/yr and preserve your capital. And it does not continue to grow.
So if you can take the loan, I say go for it. If not, keep that money in an account you can access so it can be used for your REI.
My caution is this is not for the faint-of-heart. A 401(k) is great for most people because they don't want to spend the energy needed to plan their retirements. They want a set and forget plan, which is what a 401(k) is for most people. That's a shame, too, because it means a lot of people will be forced to work well beyond their anticipated retirement date.
This was great thank you! I have the two part goal of building passive cash flow and maximizing my net worth. Why do I want to maximize my net worth? Because I want to become an accredited investor as rapidly as possible, and the more money I have, even if it is locked in retirement funds, the more exposure to opportunity I have. This is especially true since I plan to make use of Self-Directed plans as I grow as a more sophisticated investor.
That said, I believe that there is far more opportunity to invest in REI and drive outstanding returns that I can through my standard 401(k) plans. Like you said, the 401(k) only benefits one over the long term if they have a match and are looking for a low effort result.
I will continue to maximize my tax deferred retirement savings to build net worth, but also seek to harness my REI knowledge and apply those funds creatively towards REI.
Never put more than the minimum amount to receive a match in a 401K. Anything above that amount intended for retirement should be invested in a Roth IRA or other tax advantageous account.
Hi Michelle.
I actually max out my company 401k as this gives me an 18k deduction come tax time which helps me stay under the threshold to get the full 25k passive lost allowance with my real estate. Once you hit a certain amount of taxable income the 25k allowance gets phased out and needs to be carried forward I believe...
But I agree on your point one should max out a roth IRA as well or in conjunction with a corp. 401k
regards
chris
@Michelle Elsaid and @Chris Masons,
I invite you to look over to the post I have at a recent post I made and contribute your thoughts.
I like Michelle's point about a Roth IRA... I suggest a self-directed Roth that also allows you to invest in far more types of assets than just stocks and bonds?
Hi Ron
I am a huge fan of RE investing and own far more assets in RE than i do in securities.
However I do believe in diversification and spreading my money over various asset classes.
That bring said, I continue to max out a company 401k and a Rorh IRA in edition to my RE holdings.
There are great advantages to both and which is better can be debated forever, however while RE investing/income is generally thought of as passive income it truly is not.where stocks,bonds, reits, MLPs are truly passive in nature.
To each their own. there is no better one in my opinion, it is what you are more comfortable with and better at.
Regards
Chris
I'm contributing to 401k up to the maximum allowed and employer match is free money.
My plan is to convert it to ROTH gradually when my W2 income is $0 - which will be in 5-6 years if I am able to accomplish my other investment goals😄
401k is just another way to diversify, especially w/ employer match. A lot of stock-happy investors will say you can diversify simply by owning tech, agriculture and bio fuels etc.. its all the same to me and its all speculative IMO. Its also locked up until at least 55 yrs old.. i want to be free much earlier :)
I look at my 401k as a retirement present, not my retirement plan.
Bhanu,
Converting it in one fell swoop I believe would give you a fairly large tax burden correct?
Regards
Chris
That is a good plan to have as it is best to convert to Roth funds in years that your tax rates are low because amounts converted will be taxed at ordinary tax rates, but the 10% early distribution penalty does not apply.
Instead of making a new thread, I found this one.
Has anyone read the Tony Robbins book Money : Master the Game?
In summary, he basically states that stocks, mutual funds, IRAs, and 401k are the biggest scams in human history, the greatest lies every told, but tells you to go ahead and invest in them anyway! Argh.
Thoughts?
My thought is these are great vehicles to build wealth as is real estate. Both have advantages and dissadvantages.
Invest in what you know and are comfortable with. If you know one but not the other learn About the other and start building wealth!!
Good luck!
Regards
Chris
Originally posted by @Andrey Y.:
Instead of making a new thread, I found this one.
Has anyone read the Tony Robbins book Money : Master the Game?
In summary, he basically states that stocks, mutual funds, IRAs, and 401k are the biggest scams in human history, the greatest lies every told, but tells you to go ahead and invest in them anyway! Argh.
Thoughts?
I listened to the audio version, and it took me awhile to get through even at 1.5x speed lol. I thought he mentioned the biggest scam ever was Financial Advisors (not fiduciaries) and the high fees they charge. He stresses the importance of low fee index funds, which most here already know. But at the end, he goes and recommends one to go pay for a Financial Advisor.
I agree with most folks here in that diversification is important; stocks/bonds/REI/etc.
Consistency is key and one should always work to build multiple streams of income. Luckily for me, my employer still offers a pension, so I am planning on 401k/IRA, pension, REI, and dare I say social security? (bonus money I guess lol)
I'm a high W2 earner so I max out my 401k for the tax benefits. I also agree with @Scott Trench that the pre-tax money invested allows for greater compounding and accumulation. I get no benefits for a traditional IRA and don't qualify for ROTH, so I do the backdoor ROTH.
Originally posted by @Kevin Nguyen:
Originally posted by @Andrey Y.:Instead of making a new thread, I found this one.
Has anyone read the Tony Robbins book Money : Master the Game?
In summary, he basically states that stocks, mutual funds, IRAs, and 401k are the biggest scams in human history, the greatest lies every told, but tells you to go ahead and invest in them anyway! Argh.
Thoughts?
I listened to the audio version, and it took me awhile to get through even at 1.5x speed lol. I thought he mentioned the biggest scam ever was Financial Advisors (not fiduciaries) and the high fees they charge. He stresses the importance of low fee index funds, which most here already know. But at the end, he goes and recommends one to go pay for a Financial Advisor.
I agree with most folks here in that diversification is important; stocks/bonds/REI/etc.
Consistency is key and one should always work to build multiple streams of income. Luckily for me, my employer still offers a pension, so I am planning on 401k/IRA, pension, REI, and dare I say social security? (bonus money I guess lol)
I'm a high W2 earner so I max out my 401k for the tax benefits. I also agree with @Scott Trench that the pre-tax money invested allows for greater compounding and accumulation. I get no benefits for a traditional IRA and don't qualify for ROTH, so I do the backdoor ROTH.
That book is nothing but a pitch fest. There are 7 or 8 things so far that he repeatedly pitches that he has a financial interest in.
Could you elaborate on the above? I am also a high income earner, and I still don't see any reason to invest in IRAs or 401k.. at all. Do you plan on working until your 65 in your W2 job? I don't. Why even invest if you plan on working your butt off that long? Everyone will be rich at 65 (unless you really F up).
A 401k/IRA is certainly a life deferral plan. Also, 30%+ annualized returns with real estate in my experience, and that's when you hardly try.
I haven't heard of a backdoor Roth, need to look into that. My employer offers a Roth or Trad. 401k (allocate how you want) but 2018 is the first year ever they are doing an employer match (5%).
@Andrey Y.
I max out the 401k to lower my taxable income. My rough calculations show that by lowering my taxable income by 18K, I can save roughly $5K/yr in taxes. That's a big deal to me. If I wanted to save my after-tax dollars to invest 18K in the market, I'd have to earn over 25K. I see that you're a radiologist so I reckon that you're in the highest marginal tax rate.
I have a pension at my work so the earliest I can retire (with 50% less) pension is 55. Full pension at 65. I certainly don't want to work til 65, so I'll have to evaluate if it's worth staying longer. My goal really is 55 though.
That is where REI will hopefully be able to fully replace my W2 income... or just work part-time for fun.
Backdoor Roth is just basically contributing to a trad IRA (with no tax benefit) then rolling it over to a ROTH.
Newbie here.. not sure why I can' tag you Andrey
Originally posted by @Kevin Nguyen:
@Andrey Y.
I max out the 401k to lower my taxable income. My rough calculations show that by lowering my taxable income by 18K, I can save roughly $5K/yr in taxes. That's a big deal to me. If I wanted to save my after-tax dollars to invest 18K in the market, I'd have to earn over 25K. I see that you're a radiologist so I reckon that you're in the highest marginal tax rate.
I have a pension at my work so the earliest I can retire (with 50% less) pension is 55. Full pension at 65. I certainly don't want to work til 65, so I'll have to evaluate if it's worth staying longer. My goal really is 55 though.
That is where REI will hopefully be able to fully replace my W2 income... or just work part-time for fun.
Backdoor Roth is just basically contributing to a trad IRA (with no tax benefit) then rolling it over to a ROTH.
I made the mistake of thinking that a traditional 401k does not offset taxable income after a certain income level (like the IRA - I think after $110k or so AGI, any IRA contributions don't do anything). It seems that no matter your income, contributing to your traditional 401k should still offset taxable income.
Let me give you yet another example why the 401(k) is not going to help the "average" guy get where they need to go. The 401(k) plan I have at work will stop offering the Science and Technology fund effective June 9. This fund is the 2nd highest performing fund option we have for the YTD, 12 month, 3 year, and 10 year periods and 2nd highest for the five year period. It is an expensive fund ($6/1000), but the returns more than make up for the added cost. The reason?
"The other funds (like the S&P 500 index) already contain between 25 and 36% of technology funds. We don't want you to have too much in one asset class"
Now I personally kept my investment in this fund to 20%. I diversified across different index and managed funds. But it's because I had this fund that I was able to still beat those indexes.
If I take no action, they will move the money into a "Lifecycle" fund. One of those funds designed to reduce risk as you get closer to retirement. What it does is invest in other funds (no individual stocks or bonds, just funds). All of the lifecycle funds use the same funds, just different percentages. Not a one of them comes close to being a high performer. But we get charged $4/1000 for this fund.
I say all of this to remind folks that a 401(k) is there to benefit the company, not you. You have to wait to get your money or you're penalized. The company no longers needs to give a defined benefit, they can do a defined contribution and still look like they're concerned for your retirement.
I'm PRO...most people are not invest savvy, so the 401K is easiest way to save for the future. Plus they usually have a company match and or Profit sharing which helps!
Originally posted by @Andrey Y.:
Instead of making a new thread, I found this one.
Has anyone read the Tony Robbins book Money : Master the Game?
In summary, he basically states that stocks, mutual funds, IRAs, and 401k are the biggest scams in human history, the greatest lies every told, but tells you to go ahead and invest in them anyway! Argh.
Thoughts?
Tony Robbins is worth a half a billion dollars...guys in that league have money managers and huge financial teams, Im sure he has his "Charitable Trust" so he doesn't have to pay taxes!
Investing in a company 401k has many advantage's.
If forces you to save, before the money hits your bank account. IOW, you never miss the money. It also as mentioned gives you a nice deduction on your taxable income which in and of itself is a very nice perk.
Combined with the company match which is free money, it's very hard to beat IMO.
Give it time and consistency and you will be pleasantly surprised.
regards,
Chris