401K: Continue Contributions or Stop?
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!!!
Matt
@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.
@Dmitriy Fomichenko
Dmitriy...properly structured whole life insurance following the Infinite Banking Concept is not a scam...you are right, it is not an investment, but it can certainly include investments. It is a way to store liquidity and then finance things in life, such as real estate.
I have total access to my money in my policies, whereas solo 401ks and qualified plans have so many restrictions. You should really educate yourself about it. Thanks,
Paying money into a whole life policy with the hopes of borrowing against it later sounds like the dumbest financial product ever. I had an $80 whole life policy I paid into for two of three months before cancelling and they sent me a check for $1.50. Whoo hoo! This was with Northwestern Mutual who says they have the best returns out there. I don’t know where the money went and I don’t care. If you need some life insurance, term is cheap and if you die the payment is far greater. I’m not a Dave Ramsey guy, I prefer Kiyosaki, but Dave has several hilarious debates online with whole life insurance guys you should check out. Crappy financial product.
This is actually pretty easy to answer (imo), just compare the returns of real estate from now until 59.5 and the returns on a 401k. To make things simple let's say you start at 25 and start withdrawing at 60, so 35 years total. If you invest 5k today in real estate and compound it at 10% return for 35 years that's roughly 140k. Alternatively you invest 5k today, double it to 10k (let's say they match up to 5k) and compound at a very generous 7%, that's about 106k. You lose about 35k every year you choose a 401k over real estate.
I'd choose 401k for only the following:
1. You're new to real estate and might quit the game
2. You want invested money that's 100% protected if you go under (it's protected from bankruptcy)
3. You plan to invest money anyway into the stock market(etfs or index funds I hope) OR bonds. In this case, you might as well get the employer match and let it sit for a while
@Alan Johnson this was after tax time 2years ago and I just threw it on a zero percent CC ,when that expires move to another and been paying 750-1000 a month. Read through that article seems like Max is 10,000. So I would have qualified. I’ll reread but that I got out of it.
In Theory I should have only been taxed on 50k of this not 100 since I put half back withing the 60 days. unfortunately the 5298 , I think , doesn’t come to you until May stating yes you return X dollars within your 60 days.
Maybe there was something that could have been done better but I chalked it up as a big expensive learning experience.
@Aaron Wade you can give yourself a loan from 401k for ~3% APY and that way you don’t need to pay any fee or taxes so that way you can invest your money to buy properties.
@Dmitriy Fomichenko
Dmitriy...properly structured whole life insurance following the Infinite Banking Concept is not a scam...you are right, it is not an investment, but it can certainly include investments. It is a way to store liquidity and then finance things in life, such as real estate.
I have total access to my money in my policies, whereas solo 401ks and qualified plans have so many restrictions. You should really educate yourself about it.
OK Mark, I agree, let me make a correction... whole life insurance is a legitimate financial product. But it could benefit less than 5% of the population. So for most people it is "legitimate scam" (because it does not provide them with the true benefits, the insurance company and the agent selling the policy would benefit from the sale of such policy). It also might provide benefit of forced savings to those irresponsible who can't save/invest money otherwise, so when they pay premiums for the whole life policy small portion goes to "forced savings account" of the policy. But at what cost!! Cost of such policies is outrageous! Most people here can get 10-20% return investing in alternative assets. There is simply no way you can get anywhere close to that with the cash value insurance policy after factoring in all the costs! Numbers don't lie. Again, for most people the best strategy would be to buy enough inexpensive term life insurance to protect their loved once during the years when there is a need for it, and invest on their own would enable them to be significantly ahead of a person giving his money to the insurance company.
As far as educating myself: I used to sell life insurance so I think I have pretty decent understanding of the concept. However if you have such policy in place on yourself - the chances are: you don't fully understand what you have and the true cost of it.
I'd do both (re and 401k)--keep your assets diversified! This is not an either/or question. Your goal is to have so much money you've got to find places to tuck it away, not cheat your own retirement
I've always worked for myself, real estate broker/owner, so I set up a solo 401k which I Max out every year and add profit sharing from my brokerage. Also have a hsa.
Started a Roth this year with excess cash. And still buying at least one property a year.
Please please talk with your accountant and/or financial advisor about all this! You need expert help and this stuff is complicated.
Seems to me you're going to want some tax breaks via retirement contributions once you're making good money, but I guess it all depends on your income and how your set up your business.
Most of all make sure you're having fun. Life's too short to toil in a job you hate, no matter how much you make
@Matt Hangsleben keep beefing it up as much as you can. Great way to lower your tax burden. Your money will grow their abs compound better than the bank. Then borrow from those non taxed dollars to buy real estate. Win win win.
Diversification is for people that don’t know what they are doing. I like a 401k but only with a match north of 50%. Money is fake people, it’s a government system built on debt. If you want other people to control your fake money, be my guest. I like hard assets. Real estate, precious metals. To quote Robert Kiyosaki in an interview in mid August, “Gold is God’s money. It was here before government money and will be here long after the cockroaches die.” I don’t mind using debt to create wealth, that requires a high degree of financial intelligence. Kiyosaki thinks you use fake money (government money) to buy real money, gold and silver. I like to touch my investments, something physical. Play with fake money as you please to create more of it, but I’d make sure you have hard assets.
@Harrison Sharp I disagree cashing out your 401k is not the dumbest....if you employer has matched your contribution to a 401k the 30% tax isn’t that bad. For example if you have contributed 50k and your employer matched 50k you’ve already made a 100% return. Now you have 100k. And Uncle Sam takes 30k you still walk away with 70k. A 40%return, not even considering the gains or losses from the market. I will say if you’re not going to acquire a cash producing asset it is a dumb thing to do.
That’s irrelevant. You’re still taking a 30% loss to start out... let me ask you this, is there any investment you’d go into where you know you’re taking a 30% loss out of the gate? The answer is no. Cashing out your 401k is fine in specific instances but for majority of people it’s not smart unless you’re very experienced in real estate investing
@Matt Hangsleben
I used to contribute 15-25% of my income. Now I contribute 5%, and I only do that bc my company matches me up to that, which means I’m getting a 100% return on my money. Since I can’t beat that return, I take advantage of that but would not contribute more.
In fact if they didn’t match then I would stop all contributions now for a few years only bc I feel the stock market may be near its next peak so I think I’d get a better return buying cash flowing properties. But again, I have to take advantage the matching.
One thing I like about my 401k is that my banks count it towards my reserves; they only count 60-70% of it, but again since I get 100% match that’s still 10-20% more towards my reserves than if I just put that cash in the bank.
Btw I’m the same age, 35.
@Dmitriy Fomichenko @Jonathan R.
No point of arguing on the post...People should read the book, "Becoming Your Own Banker" by Nelson Nash. You guys should read it too if you have not already. It will change the way you think about where to store your "dry powder" and "liquid funds". Every real estate investor needs liquidity.
Have a good rest of the day! Thanks,
My Question to everyone on the thread. Does the tax advantage of maxing out your 401k outweigh contributing to RE? I'm at a higher tax bracket and would get royally screwed if I didn't get the advantage of lowering my tax bracket via the 401K max- Would love to hear from others in the same boat. Thank you.
@Aaron Wade I agree with you. My employee matches up to 5% so that's free money that I am not contributing. It is another way to diversify across separate asset classes. As my real estate incomes grow in the next few years I will look to max out my TSP Roth.
Thank you everyone for the feedback. It's great to hear so many perspectives and it's good to have options! I think for now I will stop contributing but leave what's in there alone and start building up savings. I caught the Real Estate Fever after making my first purchase a month ago and cant stop searching for my next deal!!!
One topic not mentioned on this thread is the 1031 Exchange. I know very little about it, but from what I do know, I've concluded it's not for me. But other threads on BiggerPockets have discussed the merits of this tax-advantaged approach.
My takeaway is to understand your alternatives and narrow them down to your best ideas. I've discovered in life that one size does not fit all. Only the math works -- live below your means and invest the rest however you decide to do this.
My Question to everyone on the thread. Does the tax advantage of maxing out your 401k outweigh contributing to RE? I'm at a higher tax bracket and would get royally screwed if I didn't get the advantage of lowering my tax bracket via the 401K max- Would love to hear from others in the same boat. Thank you.
No rule saying he cannot open some other IRA, self-directed or otherwise, and start funding that going forward. The employer 401K plan is not the only tax deferred thing out there. He can still take full advantage of that tax break.
Others have raised the question of whether he should somehow pull fund out of the 401K that he already has built up. He could simply roll it over to some other IRA, if he were to leave that company, but he isn't planning to do that. So how to access those funds to invest in RE? Not sure what the rules are regarding borrowing from these funds, but maybe that would work.
@Matt Hangsleben as everyone has said it's a personal decision. But I will tell you what I do with my 401k. I contributed 20% per pay period that my employer matches 6% of. With my 401 you can pull loans from up to the amount that I have contributed. When repaying the loan I pay myself 4% interest on the amount I borrowed. I like this method because the money is withdrawn right out of my paycheck and is not as easy to withdraw as a savings or checking account. I also like that when I repay the loan it's also withdrawn right from my pay. I also benefit from the 4% interest that I'm paying myself. The only drawback is that I can only have one loan at a time. I'm about to take 15k for a down payment and cosmetic rehab on a property. When I BRRRR the property I will repay the loan in full and repeat. Hope this may give you some idea of the options you may have.
@Jonathan R. Can you claim the interest from a 401k loan as a business expense?
@Dmitriy Fomichenko
Dmitriy...properly structured whole life insurance following the Infinite Banking Concept is not a scam...you are right, it is not an investment, but it can certainly include investments. It is a way to store liquidity and then finance things in life, such as real estate.
I have total access to my money in my policies, whereas solo 401ks and qualified plans have so many restrictions. You should really educate yourself about it. Thanks,
Never use a whole life policy for insurance or for savings ,use a term policy for insurance ,savings use a index fund for your 401-k .
Hey I have the answer everyone. Cash out all your equity and 401k and buy lotto tickets. You’ll be rich just like that.
I am echoing much of what has already been said in here, but if you need cash and have been contributing for some time, you can definitely look into taking a loan out of the 401(k). For what it is worth, my company's plan has the following terms:
1. loans up to 50% of the value of the plan
2. interest rate of 6%
3. monthly payments (interest only)
4. monthly service charge of $5.00 (really low)
5. no pre-payment - you have to run the course of the loan (this does not make sense to me)
6. if you leave the company, the loan is immediately due
Notwithstanding, I still contribute to the plan because (a) I have a company match and (b) to diversify assets. Real estate is where I am pushing larger pools of capital, but I still want to have some money at work in the markets where I cannot personally screw it up too badly! This is all food for thought - do whatever you are most comfortable with.
Older workers might want to look into the in-service withdrawal. The IRS permits this if the 401K plan permits it. My 401K plan did and I rolled my 401K balance over to an IRA each year after I become old enough to qualify. Many plan administrators do not advertise this feature, so you have to do your own research.
@Matt Hangsleben I would not personally buy real estate without having liquid money in a savings account. If you want to invest in real estate, I would either slow down your retirement contributions or work out a monthly budget so that you can cut back on non essential spending and save money from your income. For real estate I would keep money in s savings account so that it can be easily accessed and not risk a market downturn. If you want to retire before 59 1/2 and are not successful in real estate, another option is to invest some money in mutual funds outside of a 401 K to create a buffer until you can touch your retirement income without penalty.
I am personally contributing money both to a 401k without a match and paying for real estate. I think it is best to diversify.