Should I Even Keep Contributing To My Roth IRA??
New to Real Estate · Sacramento, CA · Member since 2015 · 31 posts · 13 votes
Hello All,
About two years ago I opened a Roth IRA after taking a college class for Personal Money Management since my teacher encouraged diversification and the tax benefits and all that jazz. Well since then, I have learned a lot about investing, taxes and what financial direction I want to pursue in life. REI to be specific. So I have been wondering lately whether it is even advantageous to keep my Roth IRA since I know that I want real estate to be my sole source of passive income and financial freedom. Also, I have learned that real estate is one of the best tax havens so I feel that it makes no sense to use property assets and paper assets as a tax strategy when I should just focus on using one type in order to maximize benefits and results. Thanks in advance!
I will go against the herd here. I say stop contributing to IRA and start to build up a solid 3 to 6 months emergency fund and everything else start stocking away into your RE investing account. Hoard a lot of cash and start putting down 20-25% down on rental properties and get enough passive tax deferred cash flow to surpass your W2 after tax earnings. Then double your W2 earnings with more tax deferred cash flow. THEN DOUBLE THAT!! THEN BY 35 YEARS OLD GET MARRIED, QUIT YOUR W2 EARNINGS JOB AND PLAY WITH YOUR KIDS, ENJOY FINANCIAL FREEDOM!!
I did not learn this till I was 46 years old. I cashed in my IRA, paid the stupid penalty, refinanced my house and took that money, one rental at a time and became financially free. 2011 first little 1br 1ba condo. Two years later 10 rental condos, two years later 1031 exchange condos for apartment complexes and now 89 front doors, $120,000 tax deferred cash flow per year, 5.5 million in Real Estate, 2 million to 2.5 million in equity after almost 6 years of investing. All you need is 20-25% down on front doors that cash flow $400.00 or more per month, appreciation by buying low and refi or 1031 exchange. Why make other people money, like financial planners, mutual fund managers, expense ratios, 401b fees, plan administrators. When I increase the NOI 1$ on an apartment complex I own, the bank tells me it is worth 10$ more than I paid.
Sooooooo, in a 16 month period, one of my apartment complexes I have increased the NOI by $8,000.00. That means the value of this 15 unit has already risen $80,000. In another 18 months, I expect our NOI to have increased by $15,000. Then, the complex will be worth $150,000 more than I paid. We only put $150,000down. What next? Refi and take entire investment out and keep the 15 unit or 1031 exchange for a 1.2 million property with that $300,000 ($150,000 increased value plus $150,000 down payment). Don't forget the $100,000 in cash flow taken out in those 4 years of holding the property.
That's why I don't have a dime in the stock market anymore. I have control. The stock market is at the peak!!! How much further up can it go. You have NO influence on the price of a stock you invest in. I have a great influence in increasing the NOI of my 6 apartment complexes. I only took out of my IRA the down payment ant about 30% more to pay for the stupid tax for investing in the IRA anyway and the regular taxes too, which we will pay no matter if we sell now or some imaginary date in the future.
Last, let's say you were to achieve success and have 1 million in you retirement IRA when you retire, financial experts say, you can take 3.5% out each year and not out live you money by 88 yrs old. Soooooooo, you can take out $35,000 a year and not outlive your money. Remember, you have to pay taxes on that money too. Unless you paid along the way with a Roth. Still $35,000 doesn't make me excited. Does it make you excited? The financial planners say, you will be in a lower tax bracket when you withdraw and at will be good.
I say hogwash!! They are saying our goal is to be poor. What? You see what I mean?
If you change the way you look at things, the things you look at change right before your eyes!!
Swanny
@Michael Swan Oh I see what you mean. I just read the book Tax Free Wealth by Tom Wheelwright and in it he discusses what you just said how there are many reasons RE is the best for tax strategies and how it is possible to pay no taxes! The fact that I can get paid TODAY and also reap the tax benefits is amazing.
@Henry J. At the moment I only make 20k being in the Air Force so I'm very conscious of my spending and making sure I'm not throwing my money away at something when I could be saving it for my first deal.
@Sheila F. Thank you for the book recommendation. I am always on the lookout for a great new read and I will definitely check this one out. Maybe this book will give me more direction :D
My recommendation is to continue to fund the Roth IRA, and as others have said, withdraw your contributions to do your real estate investing.
Just to clear up all the Roth-IRA Withdrawal rules that everyone is spouting, Here are the actual rules as cited from this Vanguard Article: https://investor.vanguard.com/ira/ira-distribution-rules
Below are the highlights:
"Withdrawals of Roth IRA contributions are always both tax-free and penalty-free. But if you’re under age 59½ and your withdrawal dips into your earnings—in other words, if you withdraw more than you've contributed in total—you could be subject to both taxes and penalties on the earnings portion of the withdrawal."
Also interesting thing I found out is, if you did for some reason withdraw from your Roth-IRA, you have 60 calendar days to return the money and it will be considered an "Indirect Rollover" that will not affect your contribution limit for that year. For Example, if you withdrew $20k of your principal from your Roth-IRA for a down payment, you could potentially return that $20k by day 60, and still contribute the $5500 for that year.
@Martin Morales Well at least I know I'm on the right path. Thanks!
@Sunny Burns The Vanguard Article was helpful. Thank you!
If a few hundred dollars a month is huge in your world, a ROTH may not be in the cards right now.
Before I dismissed the ROTH, I would be cutting back on all non-essentials. Driving to restaurants, malls, the movies and clubs in your fancy car payment? I'd be cutting way back so I could fund both. Brew your own coffee, brown bag your lunch and drive a beater.
The ROTH is an amazing tool I will use to pass wealth down to my grandkids. (My 2 boys are still young). Can you imagine? 80 or 90 more years of tax-free growth?
Eventually (hopefully) your RE wealth will dwarf the ROTH and it will become practically irrelevant, other than helping family I have yet to meet. I find it a privilege to still be able to contribute to (must have earned income less than $150kish). Without a holding/mgt co, I wouldn't have been eligible to contribute for more than the past decade as ALL of my income has been passive.
Cut back so you can do both. Contribute while you still can. Tax-free growth is a massive wealth-building tool that can skip a generation if you want it to. Eventually you won't even notice the few hundred a month that is such a huge part of your wold now.
As many people on here have already stated, I also recommend continuing your ROTH IRA. It is important to be diversified in your investments. Your young now and the younger you start the better off you will be in the long run. Dave Ramsey has also written some books that I would recommend on managing your finances.
I agree with Swanny. Mutual funds, IRA's, and 401k's (maybe if there is a company match-free money) are a waste of time. Save money for real estate investments or even when the right business venture comes along. See this link to shed light on this matter:
Tim
Don't get me started @Mitul Modi and @Jeff B.
I call this Deworsification now. There was a 10 year period where I was religiously contributing $6000.00 a year in my IRA and it was in small cap, mid cap, Large Cap, international, and fixed, and some went up and some went down and my value was the same as it started 10 years before. I was still at zero. My 3 rules are 1. It must cas flow. 2. It can't lose money. 3. I can't get rich or financially free slowly. I am putting all my eggs in one basket and guarding it with my life!!
Did Ray Kroc Deworsify? Did Henry Ford Deworsify? Dale Carnegie Deworsify? Bill Gates Deworsify? Success story after success story put all their eggs in one basket. They put everything on the line and saw it through to the end. Donald Trump Deworsify? Steve Jobs Deworsify? David Lindahl Deworsify? Del Walmsley LUI Deworsify?
The list goes on and on and on. The list will go on and on and on. SWANNY DEWORSIFY? Uh.............. NO!! I could retire today and never need to work for money again!! I am not waiting till some imaginary date and listen to financial planners that say, the goal is to be in a lower tax bracket when I retire.
Some of you are sooooooooooo much younger than me. I am 51 years old. You could have over 1 million in cash flow every year by my age. Maybe double that if you start in your mid 20's.
"Whatever the mind can conceive and believe it can achieve". Napolean Hill think and grow rich!!!
Swanny
Contact Quest IRA. I use them to invest my retirement into real estate.
Hi @benjamin
@Benjamin C. I read all of that and that was my old map I used to follow. How much can you take out of your IRA every month now? You still haven't explained that? Also, please explain how I am wrong on the Million dollars saved up in IRA at 65 years or 67 new full retirement age for me. I said that financial planners say I can take out 3.5% per year and not outlive my money. Am I wrong there. Am I wrong about that being $35,000 a year, before taxes? I can't stay in debatably the best weather climate in the U.S. On $28,000-$30,000 a year. Soooooooo, am I wrong that financial planners say the real remedy is to keep working to 70 or older or move to a cheaper state to live. Even if I had 2 million at 65 that would be tough and I would still not live the life and travel etc..
Plus, I feel a huge duty, responsibility and obligation to create multigenerational wealth for my child and my entire family. Then I will be able to give more to charities etc... You all notice I did not include any pension or social security either. I just can't count on that being there. If it is there, ok.
Right now my wife, my son (currently at SDSU) and I live in a small 3br 1ba and are living like no one else now, so we can live like no one else later. We are continuing to sock away $5,000 a month in our REI account to be ready for many more opportunities. Ever since investing in RE, we have more money and more importantly more net worth than we ever could have dreamed of, before changing our a paradigm. Before RE I thought I was going to live an average existence in retirement and travel a little and live with credit card debt, car payments, refinance to buy more liabilities. By having properly leveraged assets, giving us mailbox money (literally) every month, I have never been so financially secure. Most Americans are one personal catastrophe away from living on the streets. If you lost your high paying corporate job, how long would you pay your bills? 3 months? 6 months, 9 months? A Year? Most, barely 6 months if that. People reach out to me daily to see how I did this with my two w2 teaching jobs grossing $60,000 a year with 8 years of schooling and a masters degree to boot. My wife makes $20,000 as a special Ed assistant in he public schools. If I could do this, anyone can.
I am glad the Stock Market is soooooo high right now and you guys have done so well. Now how do you keep that wealth when the stock market comes crashing down? How much is going in your pocket that you get to keep? I am saving and hoarding lots of cash for the next buying opportunity. I also am using properly leveraged debt (70% loans) to defer my taxes, using cost segregation studies too, and every rule or loophole the government affords us as RE investors. Any investments gains are not real, unless you sell or take tax deferred cash flow along the way. I call that phantom appreciation or stock gains etc...
If you change the way you look at things, the things you look at change right before your eyes!! Change your paradigm, change your life!!
Swanny
We moved our IRAs (my wife's and mine) to a Self Directed custodian 2014. Since that time we continue to contribute and fund flippers, buy and hold investors, and own a duplex. So far the return in two years has been over 25% total, with minimum effort and all of that is out of the "Market." I am wholesaling several properties this month in my IRA so I anticipate having it grow even quicker.
Whether you contribute or not, the balance can still grow exponentially. The nice thing is that if you don't need the income stream now, it will be that much nicer at 59.5 if you contribute.
I know it was mentioned that Quest IRA is a place to use as a custodian. You really have to see their videos and free webinars. They have lots of great information. You can get a property under contract with your Roth IRA as the buyer, then sell your contract via an assignment. You can take 1k to 5k pretty quickly. You can lend it to other investors, buy discounted notes that end up returning 12% to maybe even 15%, use it as a hard money lender getting points and 12% interest which can end up netting you 15 to 20%.
Lots of things that you can use it for while it is a Roth. It just has to be self directed and you have to follow some rules. The tax free part is just awesome.
IRA and stocks are boring. I fall asleep watching them move up and down. Real estate will keep you engaged.
Franklin
Everyone has good points on this in my opinion. Diversification will always have credibility and be the "norm" in traditional investment theory. This is a basic and fundamental concept, such as risk vs reward.
With that said, you will find many very successful investors that were not afraid to put all their eggs in one basket. And those which exceed the norm, do not do "normal" things. Of course, no one could recommend that you go out and do that. The common theme that you find with these investors that are successful long-term (not flash in the pan types), is that they educated themselves to the point that they became experts in their field, surrounded themselves with the right people, and they are likely still diversified in that broad assets class.
The truth is, most of us should not be on completely on one side or the other of this diversification scale, but rather somewhere in between. Exactly where we properly lie on that scale is based on our individual risk tolerance, our own expertise and competencies, drive, and our time devotion. Everyone's answer will be different. Ford or Chevy? Republican or Democrat?
My personal approach, is to increase my real estate holdings proportionately with my knowledge and expertise in the field. The more time I devote in educating myself in the particular investment, the less risk I am taking, and the more comfortable I am in moving money from the traditional assets to real estate.
For Self Directed IRAs; I would suggest researching before jumping in, but they can be a useful tax tool for sure, depending on your strategy. Some things to consider that I have learned in my experience with these are; look into the fee structure (typically based on the value of the portfolio), and tax advantages vs disadvantages as mentioned by others, the credibility and strength of the custodian (look up American Greed for a fun story), and potential tax return filings each year depending on your structure and investments (ie UBIT/990 and 568/CA LLC).
Regarding the Roth IRA accounts mentioned; for those who look to retire before 59 1/2 years old, look into the "Substantially Equal Periodic Payments" exception. I hope you and I are in the position to use this election soon.
@Michael Swan that's awesome! Thank you for sharing your story-inspiring...