Investor · Cleveland, OH · Member since 2011 · 603 posts · 130 votes
Last year I purchased my first 3 rental properties. This year I want to purchase 3 more. I am funding them with the cash from my consumer electronics internet business. I put about 19K in my SEP in 2013 and my CPA says I should add $18K more to max it and hold off on buying more real estate.
My first thought was that I never intended for my IRA to be my retirement vehicle - I want a large portfolio of cash flowing properties to be what I retire on. Not to mention 19K is a pretty significant investment when I am 30 + years from touching it. He keeps talking about the instant tax savings and compound growth but I dont think he understands all the financial long term benefits of real estate.
Am I wrong here? Should I listen to my CPA and max out my SEP or should I stick with my plan of 70% real estate 30% Stock market? It would mean I would buy 2 houses instead of 3 this year.
if you use self directed 401k you might be able to do both, shelter more of your income from taxes and then use your retirement funds to buy real estate. In this case all of the real estate gains inside of your 401k will be sheltered from taxes and the growth will be compounded.
if you use self directed 401k you might be able to do both, shelter more of your income from taxes and then use your retirement funds to buy real estate. In this case all of the real estate gains inside of your 401k will be sheltered from taxes and the growth will be compounded.
Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
12y
I would echo @John Adamkewitz 's comments about reserves. There can always be unexpected expenses. I generally look at my returns based on projections. If I'm buying a dividend producing stock, is it worth putting my capital into a stock generating 5% returns, or should I shoot for 15% returns (less taxes).
My personal goal is cash flow from my rentals and to have enough cash flow to offset 95% of my personal expenses. If I were to hit 100% offset, all of a sudden, my IRA becomes icing on the cake, not just the cake.
Investor · Cleveland, OH · Member since 2011 · 603 posts · 130 votes
12y
Good tips.
No this contribution would not put me into a lower tax bracket. My reserves are fine according to my mortgage broker. I dont think I will be maxing it out but I will add something
Real Estate Investor · StL, MO · Member since 2008 · 296 posts · 152 votes
12y
Your accountant is looking at it like this: If you put the $19k in your SEP, you get to invest $19k now. If you don't put that $19k in your SEP, you pay tax on it at your marginal tax rate. Assuming 25% combined Fed & state tax (could be more or less depending on your situation) you will only have $14,250 to invest in real estate (or anything else). Because of how math works, you will immediately have 33% more money to invest inside your SEP vs. outside of it. Keep in mind that the SEP is only tax-deferred, not tax free, and you will eventually pay tax on withdrawals.
That said, you will have to determine if the tax trade off is worthwhile in order to build your real estate business. Do you need this cash to purchase 3 more properties this year? Do you need it to purchase even 1 property this year? Would it limit you to buying only 2 properties? Is it that bad to only buy 2 instead of 3 properties if you have a fully funded SEP to go with it? What amount can you contribute to the SEP and still meet your real estate goals?
Personally, I made the decision to forgo retirement savings (outside of 401k & the company match that comes with it) the last couple of years to focus on buying real estate and now that I have built a nice base of cash flow I am going to increase the funding of my retirement accounts from now on while still being able to grow my real estate business.
If you choose to forgo the SEP for now, I suggest you make it a goal to fully fund it at a point in the near future to help build your long term wealth.
there is no simple answer to this question, it would depend on number of individual factors. This may or may not be right for you. If you wish to discuss this further about your particular situation, PM me and I'll be happy to brainstorm this with you.