Continue House Hacking or Start Roth IRAs?

Question

Hey Bigger Pockets Family!

My husband and I have reached a point where we need to make a concrete decision. We would love your feedback and experiences to help us figure out what we want to do. We are both 25 years old and just last year purchased our first house hack. We currently live for free and when we move out for our next house hack, will make roughly $1k cashflow on this property. My husband makes $50k/year which will increase significantly in the coming years. I am actively applying and interviewing and should make approx. $60-65k/year. ($110-$115k/yr total)

We are committed to serious financial goals including achieving financial independence by age 40. We previously planned to achieve this by house hacking our way to acquiring 10 rental properties within the next 10 years. Once getting to that point, deciding next steps (selling properties and purchasing apartment complex, etc). We are also pretty passionate about real estate investing and enjoy the process.

At this point, is it worth opening and starting to invest in the Roth IRA vehicle? Or is it best to just throw all our extra cash at our next house hack? We fear our Roth IRA contributions will get in the way and prevent us from purchasing the next house hack thus preventing us from achieving our FI by 40 goal. I also don't plan to work a w2 job forever as we want to start our family soon, which will decrease our income. If we were making that $115k+/yr long term, I don't see a problem with doing both simultaneously, however that may likely not be an option in the long-term.

Thanks much for your feedback!

Michael Metzger · Answer

@Samantha Prince You have a good thought process there. Roth IRA distributions follow a set of IRS rules and it depends on what's being withdrawn, cost basis, earnings, or conversion contributions. The below Nerd Wallet article sums it up pretty well.

https://www.nerdwallet.com/art...

Samantha Prince · Answer

Thanks for the feedback. Quick question, how soon can I take the contributions out of an Roth IRA without penalty? Do I have to wait 5 years or is it immediate?

James McCard · Answer

That I am not sure on and honestly should probably be answered by a tax professional or a financial advisor. I have held my stuff for a long time so I know it wasn't an issue. I think the account did have to be open for a certain period of time.

The being said - if it is a small percentage of your income it's not really something you will miss. I max out my Roth IRA every year and also contribute 10% of my pay (before taxes) to my Simple IRA as I shift into a debt reduction phase later in the year this year I do plan on upping the contribution to 15% of my gross pay once I feel comfortable with my level of debt or have eliminated all my bad debt (incurred getting the real estate stuff going).

James McCard · Answer

I think a lot of people think if I am going to do real estate that I am going to do just real estate and other forms of investing are sub-par. I am for sure in disagreement with that. If you have a bunch of different slices of pie if the value of one goes down the rest is not effected. Some would say that this limits me - although I do not feel limited in any way. I too am on the road to FI - I am turning 34 in April and would like to by 38 make more from real estate than I do my W2... work 2 more years just to build up a bit more of a financial runway (@Scott Trench) I think coined that term in Set for Life. Be done at 40 years old and just enjoy FI or keep hustling (which is more than likely).

So keep doing real estate - I would keep not discourage you from opening a Roth IRA and like someone else mentioned you can use the contributions (not the gains) penalty free.

I just did that in Feb of last year. Bought a rental for 24k - I turned it and basically have it rented (under market value... but Corona) to a friend of mine.

Harrison Sharp · Answer

Investing in houses is going to get you to FI the quickest due to leverage. If your plan is to jump from house to house and build your portfolio that way it probably doesn't make sense to do a roth until you get your incomes up to when you can afford that in addition to your down payment. I'm a pretty big proponent of diversifying.

You can also take out your basis in your roth IRA's if you need the cash.

Continue House Hacking or Start Roth IRAs?

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