Investor · Houston, TX · Member since 2019 · 50 posts · 23 votes
If your 401k provides a low rate of return and you know you can invest your money at a higher rate of return than the fees associated with withdrawing your money plus the opportunity cost of leaving your money in the 401k, why would you keep your money in a 401k?
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
6y
"401(k) provides a slow rate of return" has very little to do with the 401(k) and far more to do with what you invest it in. We can invest 401(k)s and IRAs in basically anything, including real estate (with caveats), so there's less need to take that tax hit and pull the funds out.
The tax savings when contributing to a 401(k) are enormous. It's very difficult to make up for that big tax hit if you're in a high tax bracket. You're essentially putting yourself behind right out of the gate. For high income earners, deferring the tax bill gives us far more capital to invest, which numerically ends up in a much greater final result. Then when we retire and are in a lower tax bracket, we can take distributions.
Flipper/Rehabber · Indianapolis, IN · Member since 2013 · 61 posts · 43 votes
6y
@Justin Windhamneither solo401k has a 3rd party custodian. We are the custodians of the trust accounts. We do have an administrator who files the annual compliance paperwork and is our "go to" for questions.
You could shelter up to $57k into a Solo 401k for 2020, given sufficient income. If you are over age 50, catch-up contributions bring this up to $63,500. All of these contributions can be made as the employer, if you prefer. Just be mindful that it takes more income to do so compared to making employee contributions in addition to employer (profit-sharing) contributions. This is because employee contributions can be 100% of your income up to the deferral limit, while employer contributions are limited to 20% or 25% of your earnings depending on how your business is structured. For corporations, it is 25% of your W2 wages. For other types, it is 20% of your net earnings from self-employment. There are some helpful contribution calculators that you might want to check out to see what you could contribute. Let me know if you'd like a link.
@Justin Windhamneither solo401k has a 3rd party custodian. We are the custodians of the trust accounts. We do have an administrator who files the annual compliance paperwork and is our "go to" for questions.
Are you saying that the Roth IRA was transferred to a Solo 401k too? If so, I'm sorry to say that's not allowed. That's what made me wonder how you chose to structure the Roth IRA.
I’d like a link. Years 1/2 out of residency I got some bills I need to pay but after that I need to shelter money to limit the amount I repay to student loans under plsf and this seems like a great way.
My employer matches 4 percent (about 12 grand of w2 wages) and then if the hospital hits a goal they contribute another 19500 to a separate work funded account. Not sure if that counts as employer contributions or not since if My hospital were to go under (it wouldn’t) if it still counts toward that cap. I have a side job that I can make fair money but I’m not sure if it’s worth it with that 20 percent tidbit you just shared. thanks for the info tho.
Rental Property Investor · Chubbuck, ID · Member since 2018 · 532 posts · 466 votes
6y
Free money( match), diversification in asset classes, stocks are very liquid, very passive, tax free growth (Roth), belief in capitalism and the American company, good solid return history, cheap entry with ongoing contributions, etc.
Investor · Sarasota, FL · Member since 2015 · 17 posts · 10 votes
6y
@Steve Chan Thanks for putting this out there, especially the math supporting the logic in the 2 scenarios. I don't think enough people work through the math on some of this analysis to get more clarity on making the right decisions. This is such a great question and one that most of my investors ask every day. As the majority of Americans have their net worth tied up in qualified retirement plans or equity in their primary residences it is prudent to evaluate the merits of each asset.
One point to add I think is critical is that with a 401k or other qualified plans you have NO CONTROL over the asset and are subject to the government parameters set forth. Sophisticated investors look to have as much control over their assets as possible. If you have not read Tom Wheelright's book "Tax Free Wealth" I highly recommend it. Tom is vehement about control and tax efficiency.
I personally went through this scenario about 6years ago and did pay the early withdrawal penalty and converted all of my 401k to syndications. Looking back I am still confident of the decision and have 1) outperformed the 401k, 2) have control over assets, and 3) am much more tax efficient. The cashflow and control of my money has in fact help me weather this COVID storm.
Tax free income is the main reason I use Roth IRAs and 401ks. 1031s have timing issues sometimes, I'm a "buy and hold" investor and run out of depreciation, property rents increase and produces positive cash flow, more principle gets paid back and less interest creating less write offs. I have real estate and notes inside qualified plans and outside of plans. Tax free income is better than my outside investments even with 1031s. Also always try to invest in what gives you the best ROI in or out of a qualified plan. I hope this helps from 40 years in real estate And RE related investing. I wish everything I own was in a Roth.