Rental Property Investor · East Grand Forks, MN · Member since 2018 · 10 posts · 21 votes
I recently purchased my first rental property with no money down. I did so by necessity as I am cash broke! However, I do put a substantial amount of money into my 401K account every pay check. I have always been relying on having a very nice nest egg waiting for me when I retire, but like many of you, am starting to realize that I don't want to wait until I am 65 to enjoy it.
For the last 10 years I have been so focused on building up my 401K, but now for the 1st time I am really considering stopping all contributions to focus on real estate investing. I ran the calculations and found that my projected 401K value when I retire will be cut in half if I stop contributing now (age 36) and leave what I have in there.
I'm looking for advice! Have any of you taken the plunge yet, how has your experience been? Any recommendations??? Thank you!!!
Flipper/Rehabber · Westfield, NJ · Member since 2018 · 111 posts · 84 votes
7y
@Matt Hangsleben this is a tough question. I stopped contributing to mine years ago when I learned at a financial education seminar that if the employer doesn't match, it doesn't make sense to keep contributing to the max amount. If your employer matches, I would continue to contribute, but lower the contribution. If you do that, however, you need to take the additional monies that you now have (after taxes now) and put it into a fund that you will use for some other investment. It's far too easy to spend it. The idea is that through your real estate and other investments, you won't even have to dip into that 401(K) later on, so the fact that it will be far less won't be an issue. But that really depends on how you plan to ramp up your investing. If I were you (and I did this) I would consult with a registered investment adviser about overall wealth planning and your goals...and I don't mean a financial advisor..there is a difference. You don't want someone trying to sell you products, you want someone trying to help you analyze your current status, where you want to go and how much you will need.
Flipper/Rehabber · Westfield, NJ · Member since 2018 · 111 posts · 84 votes
7y
@Matt Hangsleben this is a tough question. I stopped contributing to mine years ago when I learned at a financial education seminar that if the employer doesn't match, it doesn't make sense to keep contributing to the max amount. If your employer matches, I would continue to contribute, but lower the contribution. If you do that, however, you need to take the additional monies that you now have (after taxes now) and put it into a fund that you will use for some other investment. It's far too easy to spend it. The idea is that through your real estate and other investments, you won't even have to dip into that 401(K) later on, so the fact that it will be far less won't be an issue. But that really depends on how you plan to ramp up your investing. If I were you (and I did this) I would consult with a registered investment adviser about overall wealth planning and your goals...and I don't mean a financial advisor..there is a difference. You don't want someone trying to sell you products, you want someone trying to help you analyze your current status, where you want to go and how much you will need.
Rental Property Investor · East Grand Forks, MN · Member since 2018 · 10 posts · 21 votes
7y
Thanks Tahra! There is no employer match. And I do agree I need to find somewhere to keep it other than my checking/savings accounts. Time to start looking for a fund to put it in.
I think this is all about personal preference. Can you do a little bit of both? Are you contributing to a Roth IRA (withdraw contributions penalty free)? How passive do you want to invest? You will need to consider a lot of factors.
I personally like taking advantage of these accounts and then invest in RE when those buckets are full.
Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
7y
This is a personal finance decision. Once money is put in a retirement account, it's behind a firewall that lets it grow in a tax-advantaged fashion. It also can be difficult to get the money out if you find yourself in a bind and need it to pay bills.
I contributed the maximum amount allowed to retirement accounts when I was working ("pay yourself first"), but would cut back on my contributions if I saw clouds on the horizon. I worked in a boom-and-bust industry and when the vice president was seen entering his office with a stack of personnel folders, everyone knew something was going to hit the fan soon. When the crisis had passed and if I was unaffected, I would resume making my full contribution amount.
Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
7y
@Matt Hangsleben
This is all about personal preference.
I am not a fan of qualified plans as your money is locked up. I think it is very important to have a lot of liquidity when you are investing in real estate. Qualified plans do not give you much liquidity. There are ways to get tax free growth in products while also having liquidity. Thx!
Investor · Pacific City, OR · Member since 2016 · 174 posts · 123 votes
7y
I think having a 401k behind a firewall (to an extent) is a good thing. It helps me diversify, while getting a tax benefit today. Luckily my company matches, so that helps motivate me as well. I can always take a loan from it if needed.
Lender · Asheville, NC · Member since 2019 · 60 posts · 50 votes
7y
Pros:
Bankruptcy Shelter
Matching funds from employer. (Up the the match %, it is 100% return).
Defer taxes
401K loans (if available)
Cons:
Not as liquid as other options
Market volatility (unless it's in low risk bonds or similar)
Maintenance and management fees
If you have a high W2 wage, consider how much pegging the 401K will save in tax arbitrage to wait to claim taxes at a lower effective tax when you retire.
Consider an HSA account if you have a qualified insurance plan (high deductible). Limit is $3,500 ($7,000 for families) in 2019 + $1,000 catch up if you are over 55. At 65, the account essentially becomes an IRA and you can pulls funds for non-medical expenses.
Your return is effective tax bracket + (bank deposit rate * average balance). Unlike a flex spend account, it rolls over each year.
Unless you get a match from your employer, the mathematical answer is to stop contributing to the 401k. With limited investment options, fees and inflation from now until you’re 65, the concept of tax free or tax deferred growth doesn’t put you ahead. You can do better now with cash in hand and build a portfolio that will benefit you now and in the future.
@Matt Hangsleben one of the best low risk investments you can start (if you haven't already) is a roth IRA. Currently, are only allowed to invest a max of $6k/year. You are allowed to take out anything you put in at any point in time (if needed) penalty free. Any compound interest will be heavily taxed if taken out prior to turning 59 1/2 years old. It is a great way to start another nest egg!
El Cajon, CA · Member since 2018 · 5 posts · 10 votes
7y
@Matt Hangsleben
Check out whole life Insurance. Might not be the right fit for you but tons of benefits. I use paradigm life as an adviser. Check out podcasts on the subject to get some basic info.
Rockford, IL · Member since 2015 · 343 posts · 95 votes
7y
@Matt Hangsleben I too have been struggling with this also. My Finanical advisor and CPA says, of course to max out your 401k however I am torn. He sent me a audio book on audible called The Power Of Zero by David McKnight. It gives you ideas on how to retire with paying zero taxes.
One thing it talks about is Will taxes be lower or higher when you retire? If you think higher then why put it in a taxes free now when you will have to pay later. This now makes me question my 401k max.
Here is a screw up I did. So after reading this book I said screw it and pulled 100,000 out of a TD Ameritrade account. Half was going to go to him, which is a friend, and the other half I bought a house free and clear.
Meanwhile a lady at my accountant office was setting up our LLC. I called a couple times to verify how it's going and to see if I need to come in, of course she said we are working on it and we will let you know. Months go by getting closer to tax time a call again. Yup doing it.
We make appointment to do taxes. I give them my info and the accountant is unaware that her assistant did not finish our LLC in time. Oh and she quit. So now I have my W2, my rentals, and this 100k as income with no LLC to run losses through. This threw us in a high high tax bracket where we could not get all the credits that would have been available to us. Bottom line is I owed the IRS 36,000 on a screw up between me pulling the 100k and them not making my LLC in time.
Do I still want to pull the rest of my 401k out? Yes but very worried about the taxes and penalties one will have to pay.
Good luck. Sorry if this has no paragraphs, I am on my IPhone and it seems to always lump together.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
The tax deferred advantages of a 401k are not as great as they seem. You still have to pay taxes when you retire, my guess is you’ll be in a much higher tax bracket then than you are now. Also, the stock market right now is grossly overpriced or insanely overpriced. If you just love owning stocks I might consider waiting for a big pullback (that is coming). I agree with the Roth idea over a 401k with zero match but after the big pullback.
I’d considering blowing up the 401k right now, get a loan on it and/or take a hardship withdrawal (I had to re-enroll in school in another master’s program to do it). Forget the tax implications, you’ll make your return back infinitely quicker in real estate. You’ll need a million bucks in a 401k to get you monthly what like 200 grand can get you in real estate. The key is knowing the difference between a good deal and a bad deal. I don’t buy without a 20% cash on cash return. I’d recommend a cash deal only to get started and as you are more comfortable you can look at leverage, but smart leverage.
Catskill, NY · Member since 2018 · 636 posts · 668 votes
7y
I've been toying with the idea of cutting back on contributions to my TSP (government 401k) to the employer match amount. I'm pretty risk adverse, but since I have quite a bit in there now, I think lowering the contributions might be ok. My plan is to not NEED that money when I'm in my 60's, 70's, 80's, etc. I want to retire much earlier than 59 1/2 and dumping money into my TSP isn't going to get me there.
Rental Property Investor · Atlanta, GA · Member since 2016 · 325 posts · 253 votes
7y
@Matt Hangsleben I have been putting in my 401k to max alongside my rental investments. It’s a tax deferral strategy for me. People always ask how can you reduce the taxes you pay on rentals? Well, I ask how can you lower your taxes on all your income? This one offsets for me. I also fully max out HSA and any other tax savings vehicles at my disposal. In real estate, besides how much money you have, it also matters how you use it. Great job getting your rental with no money down.
Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
7y
Always contribute up to the employer match. If there is no employer match than you need to do a simple calculation on your W2 income tax basis to understand the delta of funds that you must now take action with if you will no longer be contributing to the 401k.
Savings accounts and CDs are not a good place to pile up your “opportunity fund”. There are much better options available to the general public.
Take a look at something like AHP Servicing (Google it) for a 10% preferred return while you figure out bigger investment plans for the cash allocation.
Another solid long term strategy is to use “infinite banking” thru a high cash value life insurance policy designed with lower costs for investing purposes.
Rental Property Investor · San Diego, CA · Member since 2019 · 2 posts · 1 vote
7y
@Matt Hangsleben I don’t know if there’s a solid answer because the market of real estate and your 401K will be so different.
I would say it would depend on if you’re getting some matching from company on 401K? That’s a big perk if you do.
Also, can you save enough to buy a cash-flow property with the 401K funds you’ll be setting aside for real estate? Because if not, you have to consider the tax event of what will happen later when you need cash out of a rental or a flipped house. There’s almost always taxes at the end-sale of real estate you need to factor in...unless you’ll move into it for a few years to claim it as primary residence.
Just some thoughts, a local real estate investor in the market you’d put money into should be first point of contact to discuss.
Rental Property Investor · Dayton, OH · Member since 2015 · 312 posts · 273 votes
7y
I borrowed on my 401k to get a down payment for my first real estate investment - multi house hack purchase. That worked out great! Later, I cashed out entirely upon leaving my 9-5 and sunk it all into REI. Wow, what a great move that turned out to be! Now, I am my own boss. These are bold moves and can't easily be turned back, though. Spend some time planning first!
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Harrison Sharp Why is it horrible advice? It’s about opportunity cost. If you can take your money and make a much better return than do it. Being a slave to Wallstreet is horrible advice. He gets zero match. I too do a 401k up to 6% but I get a 75% match up to 6%. I like to control my money.
Rental Property Investor · CA · Member since 2018 · 225 posts · 180 votes
7y
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
I think I am going to cut my contributions back to the max amount my company matches and with the difference plus the amount I just received as a yearly raise into something else. I have yet to decide if that something else is simply an index fund or an ally savings account.
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
I think I am going to cut my contributions back to the max amount my company matches and with the difference plus the amount I just received as a yearly raise into something else. I have yet to decide if that something else is simply an index fund or an ally savings account.
If you take a loan on your 401k the interest rate is like 4% and the interest is paid to you (it goes back in your 401k). You can still contribute and get your 401k match while the loan is out. It’s a great loan, I highly suggest it if you know the difference between a good deal and a bad deal in real estate. Wallstreet has brainwashed too many people into being afraid of using their own money.
I recently purchased my first rental property with no money down. I did so by necessity as I am cash broke! However, I do put a substantial amount of money into my 401K account every pay check. I have always been relying on having a very nice nest egg waiting for me when I retire, but like many of you, am starting to realize that I don't want to wait until I am 65 to enjoy it.
For the last 10 years I have been so focused on building up my 401K, but now for the 1st time I am really considering stopping all contributions to focus on real estate investing. I ran the calculations and found that my projected 401K value when I retire will be cut in half if I stop contributing now (age 36) and leave what I have in there.
I'm looking for advice! Have any of you taken the plunge yet, how has your experience been? Any recommendations??? Thank you!!!
Matt
Matt, can you qualify for a Roth IRA? If you can, start one and make it SELF DIRECTED. As a self directed IRA, you can use your IRA to buy real estate.
If your employer does NOT match your 401k contributions, my suggestion is to STOP contributing there and contribute instead to a self directed Roth. The money grows tax free and you get it tax free also. 401k - the money grows tax deferred but not tax free during distribution.
Keep in mind though that when you use Roth IRA to buy real estate, all the gains (cashflow, appreciation, loan paydown) go towards your retirement. It's not liquid as well. You have to wait until you're 59 1/2 to touch the money without paying the 10% early withdrawal penalty.
Another option, which is not as well known as 401k and Roth IRA is cash value life insurance that grows with the stock market but does not go down when there's a market crash or decline. You can contribute and use the money for whatever you want and it's liquid (you can touch the money without the 10% penalty). I am not an expert on that but I can refer you to one if that is of interest to you.