Should I Even Keep Contributing To My Roth IRA??
New to Real Estate · Sacramento, CA · Member since 2015 · 31 posts · 13 votes
Should I Even Keep Contributing To My Roth IRA??
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Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
9yI 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
73 Replies
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes9y
Hi @Benjamin C. and @Brandon G.
Thank you for the complement!! I just wasted a lot of time with Deworsification and I can't have any influence on Apple stock. But I do have a big influence on increasing or decreasing the NOI of an apartment complex and have a lot of control over my 87 front doors. I do agree I am diversified with 6 different apartment complexes as each complex as its own individual business. Plus, I have 9 single family rental properties too. I do wish to eventually have 10000 front doors or more in the future. Maybe 2 to 4 rather large apartment complexes. Of course, right now I am keeping w2 jobs. I guess that is a form of being diversified too. I just want control of my investments from now on and stocks, just does not give me the desire and I feel like I am just flipping a coin, with how high the stock market is right now.
Swanny
- Broomfield, CO · Member since 2017 · 7 posts · 4 votes9y
I'd absolutely continue to contribute. It may not be the main source of your retirement funds but it's a fantastic way to stay diverse and you can play it relatively safe with choices like ETFs and Mutual funds that you can sit on and be "hands-off." I would decide how much you can contribute without interfering with your ability to jump on a great deal - maybe the full limit isn't right for you.
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes9y
Hi @Benjamin C. and @Brandon G.
That was I want at least 1,000 front doors. I added a zero, by accident. The 10X Rule by Cardone would say I should say 10,000 front doors. By the way Grat Cardone has another book out, that I will read soon. The 10X Rule got me to shoot for 1,000 front doors. I first wanted 100 a few years ago. I am almost there. Only 13 more to go to that original goal. Should have 100 at least in the next 6 months.
Swanny
- Investor · Billings, MT · Member since 2016 · 41 posts · 10 votes9yBart Hedgcock are you sure that's true? I've had two separate advisors tell me there is a 5 year holding period before you can withdraw your contributions tax-free?
- 9yRich N.Pro MemberInvestor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
@Account Closed
For sure, continue with it. Because you want to diversify ALL your holdings for the long run. Some rambling reasons (so you need to check into some of them):
1. a ROTH IRA grows tax free.
2. you can do a self direct IRA for your properties
3. yes, you have to wait until 59 1/2, but pretty sure that is for the gains...your contributions can come out sooner and tax free (cause it was put in with after tax dollars).
4. rental income is taxable
5. when you get old and retire from RE and have your PM do the work, you can play the stocks.
6. in retirement, you should be funding your retirement with taxable and non-taxable income. - Lakewood, WA · Member since 2014 · 8 posts · 3 votes9yAnything that can diversify your portfolio is always a benefit.
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes9y
Originally posted by @Account Closed:
Bart Hedgcock are you sure that's true? I've had two separate advisors tell me there is a 5 year holding period before you can withdraw your contributions tax-free?
My point was really that you were free to withdrawal contributions before the age of 59 1/2, but I did go and look it up. I believe you are correct there is a 5 year window where the account must be open before you can take out your contributions.
See the IRS page on the topic:
- New to Real Estate · Sacramento, CA · Member since 2015 · 31 posts · 13 votes9y
@Rich N. I see that there are many benefits however, I feel that I want to have more control over my money and not be withheld from my gains for so long. I am not trying to plan for retirement. Instead, I want to enjoy life's fruits all throughout life.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
My thoughts:
1. I have several IRAs but don't bother with them anymore because RE is/has been far more profitable.
2. I have a pension so I really don't need the IRAs.
3. I have a healthy RE business so I really don't need the IRAs.
Your mileage may vary. If you are doing nothing else with the money and don't have any solid retirement planning, you should probably fully fund.
Skyline Properties - 9yRich N.Pro MemberInvestor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
@Account Closed
I see it as you need to plan for your retirement too. By having both going, you can decide which way later on. Compounding is a major point. You can put funds in your early years and it will grow (yes, you need to keep an eye on it) with little work from you whereas rental property will require a lot of work/time.
- Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes9y
Originally posted by @Michael Swan:
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.
Here's the thing Michael. As long as you've held your Roth IRA for more than 5 years, you can take your principle out without penalty or paying taxes. In other words, it can be your emergency fund. And when you reach 59 1/2 you have access to the entire account. This summer I used part of my Roth IRA for a down payment on a condo in Lake Tahoe. It is rented now but will eventually be my retirement home. Yeah, the stock market is pretty high right now but there are plenty of investments that can made within an IRA aside from stocks, including real estate.
- 9yAdolph BellamyPro MemberInvestor · New York City, NY · Member since 2015 · 49 posts · 24 votes
First, I think you should determine what you want to be your primary source of passive income (between the IRA and your real estate). You seem to be leaning towards real estate so keep at it. In a perfect world I would recommend you allocate money both to your IRA and towards your real estate projects, but if putting money into your stocks hampers your ability to use money towards your real estate, then stop putting money in your IRA, at least until that is no longer the problem. Im with @Jeff B., diversification is a very sound strategy.
- Investor · Marion, IA · Member since 2010 · 177 posts · 117 votes9ySince the Roth IRA allows you to pull your principal back out without penalties I would have to say it makes a lot of sense to at least park your money there unless you're buying buildings all the time. But 401k and Regular IRA there's a 10% penalty levied if you take money out in which case you're probably better off if you can put that cash towards RE that gives you a decent COC return. I started investing in my 401k anywhere from 6-15% of my pretax income into "aggressive" funds when I started working back in 2004. Well last year I dug through the Fidelity website for my annualized return of all the pretax cash I had invested over the last 12 years and the result was a whopping 5%. I'm in no way going to retire comfortably on money growing at 5% annualized return. Since then I have dialed way back on my 401k. In my opinion the 401k is just a way for Wall Street to get their hands on more of our money.
- Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes9y
If you are working for someone else the best thing to do is contribute to your 401K up to match. If your self-employed get a solo401K and buy houses with it if you want. But put enough into a Roth to serve as your emergency fund. I have to say that my funds did much better than Mike's but that maybe because TIAA-CREF doesn't charge so much to manage. Also, he started investing just before the Great Recession whereas my investments go back 1995 and I dumped as much as I could into the market during the recession.
- Realtor · Farmington, MI · Member since 2016 · 126 posts · 69 votes9y
@Jared Samsel:
What matters most is you are here and asking ??'s in the blog and that is a great start.
When I was young and I had similar views, thought I knew it all until I stumbled into the IRA/Roth and 401 K. I learnt quite a bit by associating with people at work who had a lot more experience than I in understanding Individual Retirement Account (IRA)
Here is my suggestion, start with Motleyfool.com, also checkout, http://preview.tinyurl.com/WhatisRothIRA
If you learn something new about IRA. Consider passing the knowledge down on to another "Yougen" like yourself.
Good Luck !
Kishore. P
- Los Angeles, CA · Member since 2017 · 45 posts · 22 votes9y
Hey @Account Closed,
I recently faced the same problem and here is what I've decided to do and why:
I believe although you should have a primary investment vehicle you are spending most of your time and money on, you should still diversify slightly and prepare for a rainy day/the future.
I set up a 401K-match program my own corporation offers to employees (including to myself)
I make automatic contributions from the paychecks my corporation pays me into the 401K account my corp has set up. I make these after-tax contributions and those contributions are matched by my corp which ends up being a write off at the end of the year as well.
I make these after-tax contributions for a couple reasons:
For regular 401K programs, the maximum contribution limit is $5,500 annually for those under 50 or $6,500 for those 50 or older. Moreover, if the employee's income exceeds certain limits, then Roth IRA contribution might not be possible at all.
An alternative is if the employer wants to provide a Roth-style alternative to a Roth IRA, then one option is to offer a Roth account within its 401(k) plan (which is what I have done). These accounts use after-tax dollars in the same way a Roth IRA does, and withdrawals from the account are tax-free.
This route allows me to diversify, prepare for the future a small piece at a time, reach my tax efficiency goals, and lower the taxes my corp pays.
Hope that helps!
- Indianapolis, IN · Member since 2015 · 125 posts · 50 votes9yTake your money out and buy property. At 23 I saw the light and decided I didn't want to be average. I closed my Roth and bought my first property, which is making me way more. It's almost doubled in value in 3 years and I'm about to 1031 that into a bigger property with more cash flow. Look at the facts man. IRA's have income limits, somewhere around $120k/yr in income. Wealthy people don't have IRA's. They have investments that pay them. Ask any millionaire if they have a Roth and they'll laugh. So make the decision, do want to be average, or do you want to be rich? I know what my answer is. Your call.
- Investor · San Francisco, CA · Member since 2015 · 201 posts · 95 votes9y
I stopped contributing to my 401K and would not again unless I was working for an employer that 100% match in which case I might contribute up to their 100% match allowance.
The reasoning was already well covered by @Michael Swan but essentially I want to keep every dollar so I can get my hands on so that I can leverage it as down payment capital on the next great deal that I will control and be able to force appreciation on. Additionally, I'll be able to enjoy these spoils long before 59 1/2 with significantly lower tax implications due to my write-offs and depreciation. I'll be in a much higher income bracket at that age as my portfolio grows and appreciates over the next 25 years as well so from a tax limiting strategy I'd rather take the hit now (not sure an IRA/401K) then at 59 1/2 (using an IRA/401K)
If you already have funds in an IRA/401K I suggest transferring to a self-directed IRA (if possible) and using that to fund a great real estate investment and leverage it with a loan. Any profits gained would have to go back into the account until you reach 59 1/2 but you might as well get the most of the funds already tied up there. Just don't contribute to it any more!
Now, I'll also say I give this advice to those that are willing to WORK to grow, maintain and actively engage with their real estate investments (which I expect most on BP are!). For truly passive investors or those not wanting any additional responsibility or required self-education then just contributing to a retirement account is much better than putting it in one of those high-yield 1% savings accounts or worse yet - buying a new matching pair of jet skis for you and your cousin to hit the lake with.
- Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes9y
Lots of great advice here.. I invest heavily in Real Estate have roughly 25 doors and they all throw off nice cash flow..... I take a fair portion of that and guess what I do with it? I diversify and ionvest in stock market as well..
Why? to protect myself. Nobody is perfect, we ALL make mistakes, good investments can go bad. Real estate markets and rental markets can crash as well.. Agreed one has more power and influence over owing a hard asset such as real estate. However, Owning stock in companies that are run by amazing CEOs such as Apple, J&J,MO,KO, DIS,O is in my opinion a great way to build wealth as well. These are all very shareholder friendly blue Chip companies that pay nice juicy dividends that if left to compound and grow can snowball to figures unimaginable...
These CEOs are much smarter than I will ever be, why not take a piece of the pie and own what they believe in?
Roth IRA is a home run in my opinion - as is investing in rental properties at a young age....
great investments combined with time (lots of it) = wealth
regards,
Chris
- Colorado Springs, CO · Member since 2017 · 74 posts · 41 votes9y
I have to agree with @Michael Swan's strategy, but with that said one reason I still contribute to my Roth IRA minimally is that I know in the future I'm probably going to want to have a chunk of money tax free to maybe buy a car or travel. If I let my cashflow dictate my decisions I may not be generous enough to myself, but this small amount I'm putting in a Roth IRA still will be my "You saved this to do whatever with" money.
Only suggestion here is that if you are at all in an employer match situation don't stop contributing there that's a 100% return guaranteed. Also I never really think of saving 6012 months of expenses in a savings account is the best method. Don't get me wrong have some cash reserves, but you have the ability to borrow against IRA's and other investment accounts so you should be able to whether a storm if need be that way as well.If the focus is Real Estate dedicate 80% of your resources for investing in that direction, but still use 20% elsewhere in the case of market turns.
- New to Real Estate · Sacramento, CA · Member since 2015 · 31 posts · 13 votes9y
Wow, I can't believe how much feedback I have received on this post. I truly appreciate the advice from all of you. This is why I love BP. The fact that so many strangers with the same passion for REI can come together to help a little guy like myself is just amazing. All this feedback has helped tremendously.
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes9y
Hi @Account Closed
Just pay it forward Jared. That's what I do. If I knew this financial freedom plan, based on my new 3 rules, when I was your age. WOW!! 1. It can't lose money. Stocks can't do that. 2. It must cash flow. Stocks can't do that efficiently. 3. I can't get rich slowly. I told you about 3.5% of $1,000,000 in an IRA at some imaginary age in the future, only returns $35,000 a year, before taxes. That is not exciting to me. I was on that old plan from 23 yrs old to 45 years old contributing $6,000 a year and only having about $300,000 in that IRA. What a joke. Now I have $120,000 tax deferred Cash Flow at 51. I don't have a dime in the stock market any longer.
This is amazing!! My Family W2 earnings, working all kinds of hours, only gives us $80,000 before taxes.
Swanny
- Real Estate Investor · Sachse, TX · Member since 2016 · 69 posts · 60 votes9y
Forgive me if someone already mentioned this - but I didn't see it.
The major reason to invest in multiple vehicles/asset classes is diversification - but I haven't seen anyone mention the diversification of future tax risk as well. People have gone into great depth about the various tax benefits of different avenues (RE vs 401(k)/IRA vs Roth vs life insurance, etc.)
What people haven't mentioned is that these are all based on legislation, written by politicians. And if you haven't already learned that legislation changes with political whims you are in for a harsh reality.
Let me give you a hypothetical: What are the tax implications if they remove the 1031 exchange and jack capital gains back up to >40%? Or change depreciation recapture rules for real estate? All of a sudden that Roth IRA filled with notes looks really good.
Tax law isn't guaranteed - it can and will change. So if you have some money in multiple vehicles, the risk of future tax changes to a single vehicle is reduced as well, in addition to any actual asset class diversification.
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