Lessen 401k contribution and use it for rental property!?

21 Replies

@Loan Tran ,

If reducing your 401k contributions means you losing your employer match - that answer would be definite NO, it would be very unwise to give up free money. However, if your employer does not offer matching contributions or if you contribute more than the match - then you should lower your contributions to get the full advantage of employer match limit and rest can direct either in an IRA (which can be invested in alternative assets such as real estate) or grow your personal savings that you can then invest as you wish.

Originally posted by @Marc S. :

I lessened my TSP (military 401k) for this very reason so I'm going to go with, yes it's a great idea and makes brilliant sense!

I did the exact same thing with my TSP. I lowered it from the maximum contribution to the minimum where I would still get the employer match (5% for federal employees). I put the rest into an account so that it can be invested.

@Marc S. So do you use the extra monthly $ to save up for ur investment or do you invest that money into a Roth IRA!? Someone mentioned that I was kind of confused! I was planning to set that money aside to save up for my down payment for my first rental home ;)
@Dmitriy Fomichenko yah, I’ll still keep the amount that’s being matched by my employer. Currently, I’m maxing out my 401k benefit ....is it 15 or 17% ? So now, I’m thinking just putting in enough of what my employer matched and get the extra cash monthly to set aside for my down payment on the first rental property.
@Anthony Gayden só instead of letting he 401k invest it for you, you reduced the 401k contribution, used the extra money to invest somewhere...as in investing in real estate!? Or what kind of investment !? Sorry...I’m super new at this, so, some of my questions might be a bit annoying!😂
Originally posted by @Loan Tran :
@Anthony Gayden só instead of letting he 401k invest it for you, you reduced the 401k contribution, used the extra money to invest somewhere...as in investing in real estate!? Or what kind of investment !? Sorry...I’m super new at this, so, some of my questions might be a bit annoying!😂

Instead of investing in my TSP (401K equivalent), I reduced my contribution to the minimum where I would still receive the full employer match, which in my case was 5%. Before that time I was maxing out my contribution by contributing $18,000 per year (this was before the limits went up).

The result for me was that I had nearly $500 extra every two weeks that I could invest in real estate rather than in my retirement plan. I don't know about other people, but for me, the returns on real estate investments are quite a bit higher than the returns in my employer sponsored retirement plan, so while it may have taken me 20 years to reach millionaire status through my retirement plan, I will reach it much sooner with real estate. 

I put more in my 401K so I can borrow against it, but I'm always looking for a way to reduce my federal income taxes. Your situation may be such that you aren't concerned about reducing you tax liability on your W2 income. If your plan allows you to borrow against it, you can save money tax deferred, then borrow 1/2 of it @ a pretty good rate (mine is 6%). The interest isn't tax deductible, but you are paying it to yourself, so you have more money saved to borrow. 

Originally posted by @Loan Tran :
Does it make sense to lessen my 401k and use the extra monthly money to invest in rental property!?

Loan, I thought about this a lot when I started working after grad school. After 3 years, I stopped contributing to my 401k a year ago. They don't match anyway. I'm putting all of my savings into real estate because I'm convinced the returns on real estate are higher. You also get tax shelter due to property tax, depreciation, loan interest, and Section 1031. You can also live in it - not that I would but it's an option. I don't put my savings into an IRA either because Tom Wheelwright, CPA doesn't seem to agree with putting a tax shelter into another tax shelter (i.e. real estate inside an IRA).

Originally posted by @Anthony Gayden :
Originally posted by @Loan Tran:
@Anthony Gayden só instead of letting he 401k invest it for you, you reduced the 401k contribution, used the extra money to invest somewhere...as in investing in real estate!? Or what kind of investment !? Sorry...I’m super new at this, so, some of my questions might be a bit annoying!😂

Instead of investing in my TSP (401K equivalent), I reduced my contribution to the minimum where I would still receive the full employer match, which in my case was 5%. Before that time I was maxing out my contribution by contributing $18,000 per year (this was before the limits went up).

The result for me was that I had nearly $500 extra every two weeks that I could invest in real estate rather than in my retirement plan. I don't know about other people, but for me, the returns on real estate investments are quite a bit higher than the returns in my employer sponsored retirement plan, so while it may have taken me 20 years to reach millionaire status through my retirement plan, I will reach it much sooner with real estate. 

 Anthony, I agree. The returns are higher with real estate. So far so good.

@Loan Tran Don’t reallt have much else to say then what others already have. Contribute to the Match. Not more if you can’t do more and invest in real estate. Returns on real estate generally are higher if you know what you’re doing. Of course the caveat to this is you can’t really compare leveraged returns to non leveraged returns. That’s comparing apples to oranges
Originally posted by @Loan Tran :
@Marc S. So do you use the extra monthly $ to save up for ur investment or do you invest that money into a Roth IRA!? Someone mentioned that I was kind of confused! I was planning to set that money aside to save up for my down payment for my first rental home ;)

Loan,

I was in the same boat as Anthony; contributing to hit my annual TSP max for the past few years (although deployments made that rather painless). I'm backing off my TSP (still doing 15% for now) to start saving for future down payments but will continue maxing my Roth IRA in January.

The situation will dictate, however. I have money on hand to get my feet wet with a few SFHs. Once that is gone, I'll consider backing off my contributions some more (down to the employer match limit) and perhaps reducing Roth IRA as well.

Everyone’s situation is different. But just like most people said, it depends. 

1.  Does your employer do a match of the contributions.  If so I would recommend to at a minimum put into your 401k to get the full matching from your employer. 

2.  Not sure what your tax burden is, but if you are in a higher tax bracket maxing out your contribution to your 401k saves you roughly 3,000ish dollars in federal income tax, plus whatever you state income tax is if any. 

3. What is your end goal for real estate?  That’s the biggest thing.  Flipping, house hacking, brrrr, straight up buy and hold, notes, or something else????  Tha should dictate what you do with your contributions to your 401k.  

Gah - 401k's....I'm so irritated by that financial instrument!! That money is tied up in a corrupt/insane system I can't control. Now that we're a couple yrs into BRRRR, I feel duped by everyone who recommended to me yrs ago to max out 401k. 'Duped' is putting it mildly...'defrauded' is too strong...The notion that I, as an individual investor, should put my money into a system which is increasingly volatile due to the whims of large financial institutions, global politics, environmental factors, social media, etc. for a paltry 6-8% return.....it's lunacy.

I absolutely agree on only contributing up to your employer's matching amount. Within the 401k, since I really don't like spending time on researching investments, I end up keeping it in cash or the most broad fund/ETF available. My 401k end game is once I leave my employer, I'll roll it over to an SDIRA LLC (which in contrast to 401k, is a great investment vehicle) and finally be able to use it for more BRRRR.

What you do with the add'l monthly cash just depends on your situation: interest bearing savings account, pay down other debt, crowdfunding, join an investment club, contribute to a new IRA (SDIRA, roboadvisor), the list goes on.

Originally posted by @Steven C. Suarez :
@Loan Tran one play would be to keep maxing, taking advantage of lowering your taxable income, until you find a house you want to buy then take out a loan from your 401k to buy it. Pay yourself back with interest.

 I have used this method a few times and it is good, however you need to keep in mind that there are limits placed upon 401K loans that are not advantageous to investors.

Basically they don't want you using your company sponsored retirement account as a piggy bank for investing, so they put a ton of limitations on it to make it difficult. That is why I suggest that you do not pour money into your employer based 401K thinking you can just borrow from it later. I found out the hard way that aside from one small loan of $50,000, the entire rest of the sum is trapped in the retirement account.

$50,000 may seem like a lot, but after you get hundreds of thousands in your 401K that you can't touch until you retire, and you are trying to do larger real estate projects that require much larger sums of money, you will realize that it wasn't the best idea to lock all of your money into these accounts.

@Loan Tran    There good bits of advice in each of these answers but its up to you to determine which direction to go, but since you asked the question if you should invest in real estate I think you already know the answer.  Your individual circumstances will be different and there is not a definitive answer on what is right for you.    I can tell you I have done both maxing out 401k in my 20's to early 30's  and lowered contribution (receive match) to 401k and invested in real estate in my 40's   

I wish I would have invested more in real estate earlier,  yes its more involved but you also have control of your investment unlike the 401k which involved two significant market crashes and as mentioned its two different types of asset classes when comparing.  Which is another important aspect of diversifying income streams and not have everything in wall street.   

Currently,  I have moved my a portion funds to SDIRA to have more control and wish I could access all the money in 401k without significant taxes and penalties.   I would suggest calling your employer plan and tell them you would like to move your money or take out a loan and see how difficult it is..  Another item I have discovered is your plan custodian  (your employer)  has considerable latitude in investment options and what is allow for loans and the restrictions they place.   I agree it can become trapped in your 401k and limit your investment options.  

One final thought,   even if you stop contributing you can always contribute more when life circumstances change,  being the easiest way to lower your taxable income hopefully that will change in the future

Great discussion. I think all of the TSP advice is good advice. I am a former federal employee so I understand how all of that works. As long as your 401k balance is high enough, if I remember correctly, the maximum loan amount for the TSP is $50,000. If you are close to that limit you could borrow from yourself and use it to put a down payment on a property. Possibly a duplex and live in one side. There are ways to make this work in your favor. Just a suggestion. Good luck with whatever you choose to do.

@Loan Tran

I would consider maxing out the Roth 401k contributions if the plan allows for it. Under the 2018  contribution limits, you can contribute $18,500 in employee contributions.

Later, when you separate from that employer you can then transfer the Roth 401(k) funds to a Roth IRA.

Once inside the Roth IRA, the favorable ordering rules that govern Roth IRAs will allow you to access the basis tax and penalty free as the first funds out of the Roth IRA.

ILLUSTRATION: Yen is moving the total balance in
her former employer Roth 401(k). This is a nonqualified distribution.
She requests a direct rollover of the total amount to her
Roth IRA ($100,000, $60,000 of deferrals and $40,000 in
earnings). The total amount will go to her Roth IRA. The
taxability of any future distribution of these funds will
now be determined by the Roth IRA ordering rules.

Just like some here, I borrowed against my TSP to buy my first rental and paid myself back the balance on my TSP. Borrowed again to buy my second one, did some Brrr method. Fast forward 4 yrs later, I have now amassed a net worth of more than 1M—way faster and more than what I have ever earned on my TSP working for the last 20 yrs at USPS.

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