Maxing out 401k or buy Real Estate instead?
Most Popular Reply
Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes
7yIt looks like your ROI is about 8% per year, which is not bad. Think of it this way, the only thing you did was sit back and relax (or work). Pretty passive right? Are you maxing out your Roth IRA?
I think you should look at your entire financial picture and then consider real estate. Do you have cash reserves? If so, do you have enough reserves for RE post-purchase? What is your goal? Do you have other income streams? There are a lot of factors that you need to consider.
Try your best to do both.
29 Replies
- Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes7y
It looks like your ROI is about 8% per year, which is not bad. Think of it this way, the only thing you did was sit back and relax (or work). Pretty passive right? Are you maxing out your Roth IRA?
I think you should look at your entire financial picture and then consider real estate. Do you have cash reserves? If so, do you have enough reserves for RE post-purchase? What is your goal? Do you have other income streams? There are a lot of factors that you need to consider.
Try your best to do both.
- 7yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 238 votesOP
Originally posted by @Sam Shueh:
This is a great opportunity to listen to your CPA who knows about your taxes, finances, different type of IRAs. annuities, life insurance. Most have investment trader licenses as well.
What would you do, in your current situation, if you had to pick between investing into real estate or 401K?
- 7yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 238 votesOP
Originally posted by @Account Closed:
It looks like your ROI is about 8% per year, which is not bad. Think of it this way, the only thing you did was sit back and relax (or work). Pretty passive right? Are you maxing out your Roth IRA?
I think you should look at your entire financial picture and then consider real estate. Do you have cash reserves? If so, do you have enough reserves for RE post-purchase? What is your goal? Do you have other income streams? There are a lot of factors that you need to consider.
Try your best to do both.
Thank you! I dont have Roth because I do not qualify for it :-(
What if you had to pick between real estate and 401K, what would you pick?
- Real Estate Agent · Arlington · Member since 2016 · 162 posts · 100 votes7y
Just my opinion, so please take this with a grain of salt: I'm not a fan at all of 401k's and real estate is my far preferred vehicle. That said, I do max out my contribution to my employer's 401k which matches up to 6%. I'm not set to invest in any particular funds (which is great because they're tanking) - it's merely building a cash basis. Plan is to withdraw and take the 10% penalty and redirect toward real estate when an opportunity surfaces.
- 7yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Mary Jay
If your employer provides a match for 401k contributions. I would at the very least put money into the 401K to get the match.Another thing to consider is what tax bracket you are in. The higher the tax bracket - the greater benefit you get by putting money into the 401k.
You may also look at the 401K plan options to see if they allow you to take a loan against the 401K. This does come with some risks so please consider them before going this route.
Basit Siddiqi CPA4.979 Reviews - Philadelphia, PA · Member since 2017 · 8 posts · 5 votes7y
Personally, I never believed in retirement plans, and never contributed to it. For me it was risky, and I thought it was just me until I read "Rich Dad Poor Dad" few months ago.
Also, if you don't have enough information/education in real estate and want to move your money to it, then that is even more riskier than the 401k plan.
Like mentioned previously, you need to know what is your goal and look at the overall financial picture and future.
If you are comfortable with real estate then go for it, it's proven method to earn money, again with the right knowledge and education.
- 7yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
There are some really good suggestions on this post. If your employer matches your contributions, you should aim to meet that amount at the minimum.
Another idea is to possibly rollover your 401(k) into a self directed IRA. The big contingent with this, some 401(k) plans do not allow you to rollover to an IRA if you are still employed by the company. If your 401(k) plan allows for this, a self directed IRA (SDIRA) would allow you to use your retirement funds to invest in real estate, private placements, notes and other alternative investments.
As many have mentioned, you should consult with your CPA prior to making any big decisions and changes regarding this.
Best of luck,
- Investor · Eugene, OR · Member since 2018 · 46 posts · 35 votes7y
What is your goal? Is it to retire early or work until your 59.5 years old? If it is retire early, then I would do real estate.
If you take money out of your 401k you get a 10% penalty and your tax rate. No thanks!
- Attorney · Brainerd, MN · Member since 2015 · 18 posts · 13 votes7y
My own two cents on this topic is that recently the stock market has been wobbling while the economy is booming. Employment is high, wages are slowly starting to go up, and the Fed is increasing rates. I think all those factors will lead to a very strong rental market. You have to consider real estate as part of your portfolio, it will add an element of diversification to the stocks and bonds while at the same time has unique taxation situation that you could take advantage of. Good luck!
- 7yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 238 votesOP
Originally posted by @Carl Fischer:
There are some really good suggestions on this post. If your employer matches your contributions, you should aim to meet that amount at the minimum.
Another idea is to possibly rollover your 401(k) into a self directed IRA. The big contingent with this, some 401(k) plans do not allow you to rollover to an IRA if you are still employed by the company. If your 401(k) plan allows for this, a self directed IRA (SDIRA) would allow you to use your retirement funds to invest in real estate, private placements, notes and other alternative investments.
As many have mentioned, you should consult with your CPA prior to making any big decisions and changes regarding this.
Best of luck,
Thank you!
If I roll over money from 401K to self-directed IRA then I would be able to buy real estate in it, but still would not be allowed to touch cash flow from it, right?
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes7y
All retirement accounts are designed to provide you with benefits during retirement. Self-directed IRA is still an IRA. The same rules would apply to it as any other IRA, the only difference is that you are not limited to stock market but can invest into alternative assets such as real estate.
All income from the investment owned by your IRA (rental income, dividends from stocks, etc.) belongs to the IRA. Ultimately it is your money so you could access the cash, but since those funds never been taxed you would have to pay taxes on any distributions you take from your IRA and if you do so prior to normal retirement age additional penalties would apply.
If you would like to create some additional cash flow now - that is good idea, you should do that. But you can't rely on your retirement account to help you accomplish this goal, start saving after tax money and then acquire income producing assets personally, outside of tax-deferred vehicle.
Hope this helps.
- 7yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
If you think you can’t have a Roth because you make too much $$ you should google “back door Roth” if you want one. Completely legal- also check your 401k documents because your $18k contribution may also be made into a Roth portion within the 401k plan. I love taxfree rental income and tax free appreciation. It is a no brainer.
- 7yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
Not necessarily- you can always get to your money. Penalties and taxes may be avoided in many cases. Checkout irs publication 590 for exceptions to penalties and also Look up/Google “72t distributions” rules.
- Real Estate Investor · Las Cruces, NM · Member since 2016 · 186 posts · 173 votes7y
Originally posted by @Mary Jay:
Hi guys,
Can you please help me out?
Ive been struggling with figuring out what to do. I have been putting 18K into my 401K for the last 4 years and now have 100K in it. Ive been thinking that may be I should instead be buying real estate that cash flows?
I just keep going back and forth and cant seem to figure out what to do
What do you think?
Thank you so much!
Hi Mary, I actually do both...I max out my 401k and I also buy apartments. I like having my money taken out before I get my paycheck so it's money I never miss. Stocks are on clearance now so it is definitely a good time to be buying especially if you are a long ways from retirement. There are gentle ways to force yourself to live on less and then route the rest of your investment dollars to real estate. Once you get some momentum, you'll realize you don't really need that much capital coming from your pocket. As long as you get a great deal and can force appreciation, you can harvest the equity and use it as a downpayment for the next deal... so you don't have to keep socking away money from your paycheck for real estate.
- 7yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 238 votesOP
Originally posted by @Carl Fischer:
Not necessarily- you can always get to your money. Penalties and taxes may be avoided in many cases. Checkout irs publication 590 for exceptions to penalties and also Look up/Google “72t distributions” rules.
That is a very good point! I did not know about it!
But if I use that 72t distriburions rule, the money will be taxed, right?
Lets say I want to take out 15K Then I will pay 5K in taxes (if I am in 30% tax bracket) and will get only 10K cash?
- 7yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
If it is Roth or “non deductible contributions” no taxes ——-if it is pretax money then yes you will pay tax no matter when you take it out.
- Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes7y
Originally posted by @Audrey Ezeh:
Originally posted by @Mary Jay:
Hi guys,
Can you please help me out?
Ive been struggling with figuring out what to do. I have been putting 18K into my 401K for the last 4 years and now have 100K in it. Ive been thinking that may be I should instead be buying real estate that cash flows?
I just keep going back and forth and cant seem to figure out what to do
What do you think?
Thank you so much!
Hi Mary, I actually do both...I max out my 401k and I also buy apartments. I like having my money taken out before I get my paycheck so it's money I never miss. Stocks are on clearance now so it is definitely a good time to be buying especially if you are a long ways from retirement. There are gentle ways to force yourself to live on less and then route the rest of your investment dollars to real estate. Once you get some momentum, you'll realize you don't really need that much capital coming from your pocket. As long as you get a great deal and can force appreciation, you can harvest the equity and use it as a downpayment for the next deal... so you don't have to keep socking away money from your paycheck for real estate.
Always enjoy seeing a young person post smart advice. I was 50 years old before I stumbled on RE as a hobby. The hobby allowed me to retire early and cash flow life. The 401K allowed me to take some risk and have a fall back plan along the way.
- Real Estate Investor · Las Cruces, NM · Member since 2016 · 186 posts · 173 votes7y
Originally posted by @Terrell Garren:
Originally posted by @Audrey Ezeh:
Originally posted by @Mary Jay:
Hi guys,
Can you please help me out?
Ive been struggling with figuring out what to do. I have been putting 18K into my 401K for the last 4 years and now have 100K in it. Ive been thinking that may be I should instead be buying real estate that cash flows?
I just keep going back and forth and cant seem to figure out what to do
What do you think?
Thank you so much!
Hi Mary, I actually do both...I max out my 401k and I also buy apartments. I like having my money taken out before I get my paycheck so it's money I never miss. Stocks are on clearance now so it is definitely a good time to be buying especially if you are a long ways from retirement. There are gentle ways to force yourself to live on less and then route the rest of your investment dollars to real estate. Once you get some momentum, you'll realize you don't really need that much capital coming from your pocket. As long as you get a great deal and can force appreciation, you can harvest the equity and use it as a downpayment for the next deal... so you don't have to keep socking away money from your paycheck for real estate.
Always enjoy seeing a young person post smart advice. I was 50 years old before I stumbled on RE as a hobby. The hobby allowed me to retire early and cash flow life. The 401K allowed me to take some risk and have a fall back plan along the way.
Thank you! And thanks for calling me young lol!!
- 7yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 238 votesOP
Originally posted by @Andy Bailey:
What is your goal? Is it to retire early or work until your 59.5 years old? If it is retire early, then I would do real estate.
If you take money out of your 401k you get a 10% penalty and your tax rate. No thanks!
Thank you all of you guys for helping me out...
But here is another question...
I wonder if borrowing from 401K makes sense if you want to buy real estate...
1) 401K approach:
For instance, Ive been maxing out my 401K for the last 4 years.(I think it was closer to 4 years) I have about 100K now, roughly...That is the money that are my money that I put into it...
2) equity approach :
Lets say, if I bought 4 houses (1 house per year), houses went up probably 50K-100K, so I would have made 400K... ANd it would not be my money that I had to put in, it would be money made from nothing (equity)...
3) Cashflow approach:
Lets say, instead of putting 18K into my 401K for the next few years I will buy a fourplex per year. lets say each fourplex cashflows500$ per month. that is better return, right? What if it cash flows 1k per month? That is approximately 10-12K cashflow per year. 401K cant give me such returns on my 18K, right?
Am I trying to save 5K in taxes (that is how much maxing out my 401K saves me in taxes per year) by investing in 401K but I am losing 10K per year per fourplex in cashflow?
Seems like cashflow approach is winning, right?
I just feel like I cant max out my 401K and buy real estate at the same time. I can go for company match (which is 4% and just put 4% monthly), but not sure if it makes sense to max out 401K...May be I should just just try to buy real estate that cashflows?
- Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes7y
I would at least contribute the minimum to get the employer match.
- 7yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 238 votesOP
Originally posted by @George Blower:
I would at least contribute the minimum to get the employer match.
Thank u!
But do u agree real estate makes more sense? Or am I missing something? ( besides the employer match)
- Member since 2018 · 9 posts · 6 votes7y
Only a personal opinion so like others have said please take with a grain of salt, but I'm of the belief that it shouldn't be an either or, but rather the answer is both. I think a key to anything is balance and especially when it comes to building wealth for retirement, the answer is to be diversified. As others have noted I would take advantage of any company match opportunities, then limit your spending, and invest the rest into real estate. Thanks for bringing an important topic up, best of luck!
- Investor · Eugene, OR · Member since 2018 · 46 posts · 35 votes7y
Originally posted by @Mary Jay:
Originally posted by @Andy Bailey:
What is your goal? Is it to retire early or work until your 59.5 years old? If it is retire early, then I would do real estate.
If you take money out of your 401k you get a 10% penalty and your tax rate. No thanks!
Thank you all of you guys for helping me out...
But here is another question...
I wonder if borrowing from 401K makes sense if you want to buy real estate...
1) 401K approach:
For instance, Ive been maxing out my 401K for the last 4 years.(I think it was closer to 4 years) I have about 100K now, roughly...That is the money that are my money that I put into it...
2) equity approach :
Lets say, if I bought 4 houses (1 house per year), houses went up probably 50K-100K, so I would have made 400K... ANd it would not be my money that I had to put in, it would be money made from nothing (equity)...
3) Cashflow approach:
Lets say, instead of putting 18K into my 401K for the next few years I will buy a fourplex per year. lets say each fourplex cashflows500$ per month. that is better return, right? What if it cash flows 1k per month? That is approximately 10-12K cashflow per year. 401K cant give me such returns on my 18K, right?
Am I trying to save 5K in taxes (that is how much maxing out my 401K saves me in taxes per year) by investing in 401K but I am losing 10K per year per fourplex in cashflow?
Seems like cashflow approach is winning, right?
I just feel like I cant max out my 401K and buy real estate at the same time. I can go for company match (which is 4% and just put 4% monthly), but not sure if it makes sense to max out 401K...May be I should just just try to buy real estate that cashflows?
I understand your thought process, but you have to pay back your 401k loan in full when you leave your job or quit. If you don't, you are taxed on it as income. If you move jobs you can roll over you 401k into a self directed IRA, then you can use the money for any investment you want as long as you don't benefit from it personally until you retire.
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