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.
@Jonathan R. Can you claim the interest from a 401k loan as a business expense?
I don’t know. I’ve done a withdrawal before even. I didn’t. But I sure did find as many deductions as I possible could think of for my business that year and my losses in real estate reduced my W2 income.
@David Dachtera yes, plus you can loan yourself money and pay yourself back with interest. Be your own bank! 1/2 of your 401k or 50k whatever is smaller... Up to 100k for a joint Solo 401k.
Only gotcha is a 5 yr payback.
Longer if it's your permanent residence...
Mike
@Jonathan R. I've been toying with the same idea...
@Matt Hangsleben you need to build your cash position because if we have a slow down and you are paying a mortgage shortfall due to falling rents you are gambling with your families future. You want to make sure you're adequately diversified outside of real estate. The last 5 years was a ridiculous RE bull market that people think will continue indefinitely into the future, RE will begin to go from market outperform to standard performance. Being you have a 401k match, you definitely should max out your 401k to properly diversify your assets. The federal government is providing you a great tax break for doing so and your company is matching your contributions so that's probably one of the best investments you can make.
If you need more cash, you should start considering ways to build a side hustle to generate more cash, not over extending yourself for real estate deals.
The following is an excerpt from my post The Tech Employee’s Ultimate Guide to Getting Started in Real Estate Investing:
Before we get started with real estate, you have to make sure you’re covering the basics. Assuming your company matches your 401(k) contributions, you should max out those accounts and invest in a target retirement index fund. An employee match is pretty much a risk-free rate of return that you won't be able to beat anywhere else. Then you should set up a Roth here. And if you want to learn about the RE cycle go here.
Next comes savings. As cliche as the advice sounds, it’s imperative that you live beneath your means by maxing out your savings. Adequate savings provide you the financial security to walk away from any situation or real estate deal if you feel you’re not being treated fairly. Without being able to walk away from bad situations, your life will be filled with constant stress. At the minimum, you need to save six months’ worth of living expenses in the bank so that if you lose your job you can stay afloat during these tough times. The average person remains on unemployment for three months, but during a recession, that time can double to six months.
You also need enough insurance to provide your loved ones with support in case something tragic happens to you. We all think we’re invincible, but there’s always that risk something terrible can happen to you. Your company should provide you with the option to enroll in various accidental death, short and long-term disability, and long-term healthcare coverages. Make sure you pay for your disability coverage because if your employer pays for the coverage, you will face a large tax bill. If you haven’t applied for these insurances, please consider doing so.
Then you need to get your estate in order. I’ve seen many families suffer from a lack of proper estate planning. You need to set up a trust so that it’s made clear what your directives are when you unable to act on your own behalf. If you’re incapacitated, who will make healthcare decisions on your behalf? Who should be responsible for maintaining your assets? In the tragic event of your passing, where should your assets go? All of these questions need to be answered now, and you should speak to a trusted attorney.Finally, you need to prevent yourself from getting caught in conspicuous consumption trap of buying things you don’t need in order to impress others. It’s very easy in Silicon Valley to fall into this trap because so many people are doing “amazing” things such as traveling the world or buying luxury cars and huge homes. You need to focus on your long-term goals and not get sucked into other people’s dreams. If you follow these guidelines, you will be on part of the way there to a healthy retirement.
You can read my additional thoughts here. And if you want to learn about the RE cycle go here.
@David Dachtera yes, plus you can loan yourself money and pay yourself back with interest. Be your own bank! 1/2 of your 401k or 50k whatever is smaller... Up to 100k for a joint Solo 401k.
Only gotcha is a 5 yr payback.
Longer if it's your permanent residence...
Mike
Ooohhh!!! Be careful there!
Read up on "prohibited transactions" when dealing with a SDRC ...
As to borrowing from from your 401(k), check the Summary Plan Description and check with your HR Department / Financial professional (I'm not one and this is not financial advice). In general, you can only borrow one half of your fully-vested 401(k) balance up to $50K. You must be actively contributing to this account as well, I believe. An "old" 401(k) usually needs to be rolled into something else before you can do anything further. May as well roll it into something self-directed.
Solo / Simple 401k is a self directed 401k that you can borrow against (depending on who you use for the plan). Self Directed IRA is a bit of a different beast.
@Loren Clive I agree wholeheartedly with your opinion to do both. I also max my 401k and even contribute taxed monies after the yearly max has been reached. I just started with REI however and my first deal will close this coming Thursday. I plan to continue purchasing RE in the buy/hold strategy with as many deals as I can generate. My hope is to have at least 10 paid off in the next 12 years. Getting back to the subject at hand, 401ks are a great tool for many reasons with company match being the first (provided you receive one). I have used the 401loan twice for investing purposes only. First, to buy stocks in a personal brokerage account and most recently for the down payment on my first REI. The money I pay back goes to myself so its a win,win,win. Also, by making taxed contributions, I'll have a little nest egg later that will not be taxed when withdrawn. I love the the thought of earning a small fortune through passive income generating REIs, but I think it's a great idea to throw your eggs in as many baskets as possible. For me it's stocks, mutual funds, ETFs and finally REIs.
Max out your 401k!!! Especially if your employer matches it. I didn't and I regret it.
@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,
Exactly what I said. I am a landlord who has acquired over 1,000 units and I have no financial products to sell. Beware of those who say something is a scam because they are selling something else :)
The way I look at it is this: I have an 8% "savings account" in a properly structured cash value life insurance policy so while I am looking for my next deal, my money is growing at a good rate tax free.
Financially astute people don't do what the masses do. The masses have been taught to study hard, get a good job with a 401k and save money in the bank.
I don't have a job but I have apartment units that pay my bills. My "safe money" grows faster than in a bank. And my wealth grows exponentially everyday through buying more and more apartment units.
Jonathan R,
You're crushing it if you can find deals that produce 28% cash on cash "all day every day" from a 30k investment. I dont know anyone who is performing like that. Maybe consider wholesaling these deals, as it sounds like you could add a whopper of an assignment fee to them and still have investors fighting over the deals.
Generally speaking though, there are a lot of people on BP, including myself, who used massive leverage during one of the best possible times in history to buy RE. If we copy and paste that experience into the future, our decision making will look a lot different than if we take a historical norm approach.
I'm personally taking one chip off the table by selling a property and using that to pay off my house. However, if I could get 28% C.O.C deals, I'd cash out and sell everything other that the shirt on my back to buy into those.
Why would you contribute to your 401k if there is no match? Makes absolutely no sense from my perspective?
Do you believe you can outpace the market if you invest it yourself vs funds that are offered?
If yes, don’t defer your life!
@Matt Hangsleben This is a great question and one I see many investors dealing with when they are preparing to buy or have just bought their first property. My advice would be to find a financial professional or consultant in your area that can speak to your specific situation. They would you help you develop a plan for your short, intermediate, and long term goals.
Like most real estate investors you have decided to begin your journey to have financial freedom before the “qualified plan” date of 59.5 or later. However, you seem to like the idea of having the security and comfort of the qualified plan available to you. An advisor can help you find that middle ground in a way that makes sense for you.
You likely interviewed or met with several lenders and realtors before buying your first property. Do that again when searching for a financial professional. Like asking for how much house you could afford or access to the MLS, speaking with several advisors would be free.
Without knowing the specifics of your goals, priorities, and financial situation, no one can give you the qualified advice you need. Find an advisor that can understand what it is you want to accomplish and help you achieve it.
Good luck, and congratulations!
Jonathan R,
You're crushing it if you can find deals that produce 28% cash on cash "all day every day" from a 30k investment. I dont know anyone who is performing like that. Maybe consider wholesaling these deals, as it sounds like you could add a whopper of an assignment fee to them and still have investors fighting over the deals.
Generally speaking though, there are a lot of people on BP, including myself, who used massive leverage during one of the best possible times in history to buy RE. If we copy and paste that experience into the future, our decision making will look a lot different than if we take a historical norm approach.
I'm personally taking one chip off the table by selling a property and using that to pay off my house. However, if I could get 28% C.O.C deals, I'd cash out and sell everything other that the shirt on my back to buy into those.
I’m buying from wholesalers at these prices. I don’t even have to look for them. My deal before the one I’m on now I bought a 3 bed 1 bath for $19k and it needed like 7k in work and rents for $795. The area is nothing to brag to Mom about, but I’m buying revenue streams not traveling tours of rental homes to show my friends. I’m involved with Section 8 housing. We produce a quality product.
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.
Low Cost Index Funds are better for retirement . There are a lot of fees some known, some cleverly hidden with 401ks. So low cost index funds are better for that
You could also have that money put to work for you in a property or a few properties which could exponentially increase your monthly cashflow or wealth overtime.
Exactly what I said. I am a landlord who has acquired over 1,000 units and I have no financial products to sell. Beware of those who say something is a scam because they are selling something else :)
The way I look at it is this: I have an 8% "savings account" in a properly structured cash value life insurance policy so while I am looking for my next deal, my money is growing at a good rate tax free.
Financially astute people don't do what the masses do. The masses have been taught to study hard, get a good job with a 401k and save money in the bank.
I don't have a job but I have apartment units that pay my bills. My "safe money" grows faster than in a bank. And my wealth grows exponentially everyday through buying more and more apartment units.
@Randy Janoe
I was at an REI meeting and they were talking about how to use a HSA to buy rental properties. Passive income for health care use!!
With the 401K, the admin is taking a percentage, and each mutual fund you invest in is taking a percentage. Then there's inflation, the chance that taxes will rise, and also the fact that we all hope to retire in a higher tax bracket than we are now, which is where you will be taxed when you take disbursements. There's also no guarantee that your money will be there. In 2001 and 2008, I saw people lose 40%+ of their balance. That is no good for anyone about to retire or retired and depending on the 401K paychecks. And as far as the employer match - do you really think anyone gives money away for free? I've read studies - I realize anything can be fudged - that employers that match tend to pay .90 to .99 cents per dollar. But what is for certain, is that employer matches are tax deductible by your employer - so it's essentially tax payer funded. Wall Street is tax payer funded also - remember the bail outs?
Guess who's making money on your tax deferred dollars? The 401K admins, Wall Street, and the government when they receive their fat deferred tax payout.
Your 401K, you hope, will be funded enough to carry you through retirement, but again, it is not insured and like most things, there is no guarantee. For me, I choose real estate and to use my money now, today, to buy and invest in real estate - since that's what we are all here for. RE will never go to 0, people will always need a place to live, and RE has the potential and all likeliness to outperform a 401K all year long, can provide infinite returns, and will print money for generations.
My opinion is the 401K is for people who are going to work as an employee until 59 and a half, at least, and don't want to educate themselves on where to put their money. Which is fine, many people just want to focus on their career and hand that responsibility to someone else - which is scary as hell to me
Other alternatives is that you research index and mutual funds, maybe a dividend paying life insurance policy. Create your own 401K like and 401K beating investment choices, without ALL the fees
Never EVER put all your money in real estate. And never listen to anyone that tells you that you should. Many people that lost in all in 09 wished they had sunk some of their savings into a few lousy cds. Diversification is key, and RE should just be part of your portfolio. Put it all in one place, and at 70 you’ll be living off of social security.
I like spreading things around. I invest in my employers 401k plan and they match 5%, my wife has a 403B plan for teachers that the school district doesn't match, we max our Roth out each year, and we put all extra money into real estate. I used to put 17% of my pay into my 401k but I realized several years ago that I can make more in real estate. I lowered my contribution to 6% so I would get the full employer match and the rest just goes in the bank until we have enough to buy the next property.
I emptied my 401k 6 years ago and bought a foreclosure. In the first 3 years I made all the money back that I took out of my 401k and have never looked back. Like someone suggested earlier, if the market crashes and stocks are cheap to buy I'll start up my 401k again.
I took my money out of the 401k a couple of years ago.
It makes so much sense but feels so wrong.
Matt as a Real Estate Investor and a licensed financial planner. I would be happy to answer any questions you have but before giving you advice I would need to know more about what you are trying to accomplish. What I am about to share IS NOT to put down anyones responses or suggestions!! If you ask RE Investors what you should do 9 out of 10 times they will tell you to stop investing in your 401K. If you ask a Financial Advisor what you should do 9 out of 10 times they will tell you to keep investing in your 401k. I love investing in both. As a RE Investor I am sure you have heard this phrase enough. It Depends! And it truly does.... Not only on what your goals are but your current needs, your tax situation and so much more.
@Matt Hangsleben I dont think it's an either/or. I've put money away at every job (5-10%, not the max) and when I've left them, rolled that into an IRA. Now I've rolled that into an SDIRA that is invested in a few RE development projects. One of them is just about complete and the investment and proceeds will be rolling tax free into some new projects later this year. I would not have accumulated that same seed money without the 401(k)/IRA. On the other side, I am building non-retirement RE investments to generate income to get me to 59 1/2.