Are you Pro or Against 401(k)?

197 Replies

All great discussions. 

Not I only believe everyone should take advantage of their company matched program; I also know a couple of investors and flippers who had to dip into their 401k to take out a loan in order to fund their projects. Most programs allow to a loan up to 50% of the total balance of the account at 3-5% interest APR with no penalties. Since technically this is your own money; it is a quick and cost effective way to get some cash and pay back the program once the rehab or investment project is sold. You'd still be responsible for making monthly payments until the loan is paid off but assuming that the rehab project is something that you are 100% confident will sell quickly then it makes this a viable option as opposed to going through a bank or local lender.

Lots of great discussion. I will add 2 points
1. To invest in real estate most lenders require you to show a reserve of 3-6 months of expenses for all your properties. My lender lets me count my 401k for this so it serves dual purpose as I earn stock market returns and is the reserve.
2. Roth vs traditional 401k. Since this is a real estate site and I presume many of you to be buy and hold investors. You have lots of deductions when your young for depreciation and interest on your properties. As a result probably in lower tax bracket. As you near retirement hopefully this will be paid off this no interest deduction and might lose your depreciation depending on when you bought them so likely in high tax bracket later. I will pay my taxes now at lower rate by doing Roth. That is if you have option of roth 401k so still get your match. If not investing up to match trumps any tax issues.

For many this is the only way they can stash money. If this is you then by all means do this. You might not miss the money. 

About diversification: Warren Buffet  calls it worsification. At best it will be mediocre. If your business is RE then diluting it may or may not be a good idea depending on how good your business is. Keeping sheltered funds as reserves works well if a little older.

Going all out the last 10 years of employment was good for me. That leaves a nice cushion. 

I'd have been better off never having read Money magazine. All they ever did was discourage people from investing in RE. Funny thing though most of the millionaires that wrote in did it w/ RE.

The employer match in a 401(k) makes it extremely compelling. What other investments can give you 100% return on your money immediately?  If you don't like the investment options in your 401(k), roll it into a self-directed 401(k) in the future, and then invest in real estate. That's what I've done.

Guys - this is a great discussion! I'm learning a ton from everyone. I guess that for me I keep coming back to this concept:

My goal is to maximize my total net worth and the assets I control as rapidly as possible. I believe that the 401(k) and tax deferred retirement accounts enable me to control more assets more rapidly at a younger age in life. I guess its sometimes tough to desscribe why that's so important - I simply feel that having accumulated wealth rapidly, even in a 401(k) that I can't spend for personal leisures, I will have access to opportunities that are not available to those of lesser net worth.

Again, my financial goal is simply to increase the net worth of Scott Trench as rapidly as possible, to control as much money as possible, and to reap the benefits that high net worth brings.  To that end, the tax deffered savings and immediate tax break today make the 401(k) an unbeatable way to protect my hard earned dollars, even without an employer match.

I agree with Scott on the 401k. It does have its benefits and draw backs (just like ANY other investment). I think we should save whatever we can for retirement, using whatever means available to us. You should learn about what you put your money into and never invest unless you educate your self about it. If you look into the stock market and it scares you, then try something else. Although I will say that if you try to focus on too many things at once you might end up wasting your time.

@Walt Payne  

WOW, "Double your current income after retirement"  I may have to reconsider my goals now. I have made it my goal to retire on at least the same income I receive wile working. I wont accept a drop in income.

The Roth IRA is great, but know that the IRS could change the rules in the future and tax some, or all of it. Nothing is guaranteed, and the greedy government changes tax laws all the time. With 100 Trillion in unpaid liabilities, where will the government get the money to pay the entitlements in the future. Remember, they said they would never tax social security.

Solo 401K are amazing.  

Also something that is not talked about is pulling $$$ out before you are allowed to (imagine that your RE biz is having a bad year ???2008??? & you need $$$ to live on) & paying the penalties & taxes (I bet those fees(taxes & penalties are less than what you would have paid when you made the money in the first place.  Think of the 401K as a way the manage your tax bill.  

just a thought

I struggle with this same question! I think 401k's can be very good, especially as others mentioned, when your employer matches the contributions.

Here is a dilemma, what if you do not want to work for somebody and want to work for yourself within a few years. Do you A. put some money away over a few years, and just plan on leaving that in there to very slowly build until I am 59 or later? B. take a chance on yourself, don't even have a 401k and invest in your business. That is good money to start a business or grow a business.

I have a great job now, pays well, but my employer does not contribute much to my 401k. I struggle with stopping this all together and just investing in myself as I do not plan on working for someone for much longer. I may start a self directed account but also could use all of the capital I can to take the chance on myself.

I could lose out big time taking this chance but if it works I may be much more well off than if I slowly give my money to the 401K. The financial broker sucks out a huge percentage of my investment without me knowing it. I was sick when I really dug into the fees I am paying!

Originally posted by @Dennis Lanni :

Solo 401K are amazing.  

Also something that is not talked about is pulling $$$ out before you are allowed to (imagine that your RE biz is having a bad year ???2008??? & you need $$$ to live on) & paying the penalties & taxes (I bet those fees(taxes & penalties are less than what you would have paid when you made the money in the first place.  Think of the 401K as a way the manage your tax bill.  

just a thought

 Actually, if you use a Roth option, once you have the account for 5 years YOU CAN WITHDRAW THE PRINCIPLE WITH NO TAXES AND NO PENALTIES! You only pay penalties on taking out the earnings early since the rest has already been taxed. 

I have an employer matched 401K (TSP) that I put the minimum in to get matched. Max out my Roth IRA and borrow my down payments (which the TSP makes very easy) for "Buy and Hold" properties. DIVERSIFY!

There's some big elephants in the room when using IRAs or 401Ks to buy,sell, and hold real estate in the traditional sense.

1. It has to be an all cash transaction or financing becomes an issue - both in finding money that will lend to an IRA and then in the possible taxable events (UBIT) that still happen when you borrow money to supplement a real esate purchase.

2. Self directed IRAs are much better equipped for total purchase of durable items or equities, or in the real estate world, notes and lending the amount of the IRA for a mortgage.

3. Although the tax deferred aspect is nice, remember that upon some time you will have to remove that real estate and profits from the IRA and if it is not a vehicle like a Roth that is post tax investment, you will probably be at a higher tax bracket than you are now and there is no way to avoid that hit when it ultimately moves out of the IRA.

4. While self directed investment is allowed for inside your IRA Sec 1031 exchanges give you the same vehicle outside your IRA. And the nice things about 1031s are that financing is not nearly an issue since borrowing doesn't have to be secured non-recourse, and there are several ways to ultimately eliminate the build up taxes.

Doesn't mean that self -directed real estate investment isn't a good thing.  Just think through the different ways of doing it and the now and future tax ramifications.

I believe it depends on your income because if you can have the best of both worlds then go for it but rental property advantages outweigh 401K all day long. Read the Rich Dad Poor Dad series and I am sure you will agree. Tax write offs, cashflow, and appreciation for 20 years while someone else pays it? Not an argument in my book! I have owned rentals for 11yrs and never put a dime in 401K. I trust my system, management, and decisions v/s the stock market any day.

Oh, by the way, for those who are just starting out in real estate and don't own a house yet or haven't for two years - you can take out 10,000 (20,000 if married and your spouse qualifies also) without incurring early withdrawal penalties to use as a down payment for a"first time" home purchase.  

If you want to kick start a real estate investing career and have a small IRA this could be a good way to begin. Ask your accountant for the best way to proceed.

Originally posted by @Jedd Braunwarth :

I struggle with this same question! I think 401k's can be very good, especially as others mentioned, when your employer matches the contributions.

Here is a dilemma, what if you do not want to work for somebody and want to work for yourself within a few years. Do you A. put some money away over a few years, and just plan on leaving that in there to very slowly build until I am 59 or later? B. take a chance on yourself, don't even have a 401k and invest in your business. That is good money to start a business or grow a business.

I have a great job now, pays well, but my employer does not contribute much to my 401k. I struggle with stopping this all together and just investing in myself as I do not plan on working for someone for much longer. I may start a self directed account but also could use all of the capital I can to take the chance on myself.

I could lose out big time taking this chance but if it works I may be much more well off than if I slowly give my money to the 401K. The financial broker sucks out a huge percentage of my investment without me knowing it. I was sick when I really dug into the fees I am paying!

If I could go back in time I would have invested more into my 401K than I have.  I have had money in it long enough to start seeing its benefits now which makes it much easier to be passionate about it.  When I was younger one of my employers (when I worked for a small business) started SarSeps for his employees and we received a bonus each year that was paid into it.  It helped because it wasn't my decision.  He knew that having money over long term would benefit us, we (his employees) were young and he wanted to pay it forward.  

I think something no one is mentioning is the power of compounding. When you are younger and are investing money into your 401K, Roth IRA, or standard IRA, you have the huge benefit of time. It you are earning 7%, you double approximately every 10 years. For a person who looks at the short term this isn't a big deal and they don't feel like this is something they need to be concerned about but if you look at the long term it is a much different picture. If your employer matches it is even better.

For example (taken from JPMorgan's site) if you invest 5k a year between 25 and 35 years old for a total investment of $50k earning 7% you will have 602k at 65 years old.  Another investor invests $5k a year for 30 years from 35 to 65 with their investment being $150k, assuming the same rate of return of 7% then end up with $540k at age 65.  Even if you only invest in your retirement fund while you are young and then stop you will be much more financially stable in the long run.  

I firmly believe in investing in real estate and have but I also believe in being diversified and making my life easier when I can and not just taking the hard path. Many people on this board are just starting out and have a unique opportunity to be my wayback machine and start investing now to make their path easier. If you have the extra $100-350 a month or can cut back on expenses to treat it as a bill, I would take the opportunity to do so. When my daughter is working we are going to help her start a Roth IRA so she can have the benefit of time and have an easier path than we did. There is a huge difference in your return when you have 30 or 40 years than when you start older because you are starting to understand you need to take it more seriously.

Even if tax laws change, which they can and likely will, you will still be better off than if you did nothing.  You also have the benefit of this being counted towards your real estate reserves which helps to complement your real estate investing business.

I think the 401K is a good piece of the puzzle.  Will I rely on it, no.  It is good to have your net worth broken down into a few buckets.  Just don't have your largest bucket tied to something that is not tangible like a 401K.

Originally posted by @Dave Foster :

There's some big elephants in the room when using IRAs or 401Ks to buy,sell, and hold real estate in the traditional sense.

1. It has to be an all cash transaction or financing becomes an issue - both in finding money that will lend to an IRA and then in the possible taxable events (UBIT) that still happen when you borrow money to supplement a real esate purchase.

This is only true for an IRA, though. True that you will get a lower LTV and higher interest on a non-recourse loan, but UBIT does not apply on a 401K RE purchase.

I agree that it is better to use other vehicles within a 401k, but UBIT is not a factor.

Also, the ability to borrow up to $50K from your 401K is a nice feature.

@Scott Trench  

If I can make 20%+ on my real estate investments and less than half that in a 401k, why would I invest in the 401k?  Money now is worth much more than money later.  I would rather take the cash now and invest it for 20%+ than wait, even if I'm not taxed...The return will trump the tax free benefit.

For these reason, while I was in corporate and put the absolute minimum in my 401k and invested as much as possible in real estate.  This is one of the reasons why I retired from corporate America last year.

Originally posted by @Account Closed :

@Scott Trench  

If I can make 20%+ on my real estate investments and less than half that in a 401k, why would I invest in the 401k?  Money now is worth much more than money later.  I would rather take the cash now and invest it for 20%+ than wait, even if I'm not taxed...The return will trump the tax free benefit.

For these reason, while I was in corporate and put the absolute minimum in my 401k and invested as much as possible in real estate.  This is one of the reasons why I retired from corporate America last year.

Why not have your cake and eat it too? You can have a solo 401k to invest in what you think best. I agree with others that RE itself may not be the best way to use 401k money, but what if you could get 12-14% tax free and allow that to compound? Notes, HML, etc can get you good yield and do it tax deferred or tax free.

Originally posted by @Scott Trench :

A recent article that I wrote on the BP blog received some criticism because I suggest that a 401(k) is one of the best ways to increase your net worth.

This strategy was criticized by a couple of readers and I thought I'd move the debate over here.  So here's my argument:

A 401(k) allows you to invest and grow your net worth tax free.  It reduces tax liability now, enabling you to have a huge portfolio to invest that will achieve outstanding returns for the lifetime of the account.  In my opinion, this is absolutely critical and its a real shame that someone would forgo the opportunity to take advantage of this tool.

The main counterpoint to this thought process is that the funds are not available until 59.5, and that they are taxed when they are withdrawn.  

What do you think?  Would you rather build up a ton of net worth through the 401(k) or have less assets to manage, but make them usable sooner?

I vote for the 401(k) and increasing my total assets under my name as much and as rapidly as possible.

Scott et. al,

I worked in investment management for over 10 years at some of the top mutual fund companies in the world (Franklin Templeton Investments, BlackRock, RCM Capital, etc.).

What you and everything on this board should know is that retirement plans, including 401ks, IRAs, etc. were a result of problems that occurred where employees were left with no pension and, more importantly, lobbying efforts by the large financial companies to pass the Employee Retirement Income Security Act of 1974.

For a detailed explanation, see: http://www.pbs.org/wgbh/pages/frontline/business-e...

This is very similar to many of the brokerage companies pushing people to day trade.  Who wins when people day trade?  The traders?  Your accountant?  The brokerage firm?  I'll give you a hint: it's usually NOT the people who day trade.

Questions:

A word of advice...FOLLOW THE MONEY. 

In a retirement plan, who has the money? 

Who is profiting and how? 

How much are they charging?

What value are they providing?

@Walt Payne  

I worked in investment management for over 10 years and there are very few public fund managers that can consistently generate 12-14%.  More like 6%, which is HIGHER than the average return in most 401ks.

So, let's assume 6%.  What is the point of a solo 401k that will yield 6% even if it is tax free, when you can generate a consistent 20%+ indefinitely via real estate?

@Scott Trench  

@Walt Payne  

I have a better idea. Assuming you're accredited investors, why don't both of you setup a self-directed IRA and invest in my fund, which has a preferred return of 8% and investment target of 20%?

Only kidding...but I'm willing to bet you'll do significantly better than investing in a 401k (which you'll be lucky to get 5%; see

http://www.interest.com/401k/news/kind-return-expect-401k-plans/)

I'll be honest and admit that I don't know enough about 401k's, Roth IRA's, SDIRA's etc to have a real opinion. I do have an employer 401k that I did contribute to for awhile but stopped once I started buying real estate. I did se it grow very quickly but I don't have alot of money so I figured the few extra hundred per check were better off for me to have in accessable cash to invest with. I heard that you can borrow against your 401k or access the money somehow without actually taking a penalty hit. Maybe somethign I'll look into now so thanks for starting this discussion.

Originally posted by @Account Closed :

@Walt Payne 

I worked in investment management for over 10 years and there are very few public fund managers that can consistently generate 12-14%.  More like 6%, which is HIGHER than the average return in most 401ks.

So, let's assume 6%.  What is the point of a solo 401k that will yield 6% even if it is tax free, when you can generate a consistent 20%+ indefinitely via real estate?

I absolutely agree about stock investment firms.

A solo 401K is self directed. To qualify you need to meet a few requirements. You need to be the only employee, you need to have earned income, not passive. And any funds from previous employer accounts can be transferred. 

For example how I set it up was doing my renovations out of a separate entity that bills them to my buy and hold entity. That allows me to have a solo 401k, and funnel income into a tax deferred or tax free account. And I control how the money is invested. I have several relatively high yield investments and am planning on doing some not investing soon.

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