Employer does not match 401k - should I invest?

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

3y

If employer doesnt match, might as well do a standard ira if you qualify. Youll have more investment options then.

I invest in straight S&P 500 ETFs.

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6 Reply

Jeff Nash

Accountant · McKinney, TX · Member since 2023 · 393 posts · 580 votes

3y

If they do not match the only other consideration if it is available is to do the Roth 401K option. If that is not doable then I would keep your money in the taxable bucket and allocate accordingly.

1 Reply

Robere Istatia

Accountant · Jacksonville, FL · Member since 2015 · 33 posts · 7 votes

3y

If there is no match there is honestly no reason to tie your money up with them especially if the returns are lack luster. I would either setup your own third party 401k if you’re in a situation where you need one. If not I would do exactly what you were suggesting and just normally invest. Most 401k returns are moderate at best the only reason to take advantage of them is for the match, once that’s out the picture the decision is a no brainer.

1 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

3y

Quote from @Russell Brazil:

If employer doesnt match, might as well do a standard ira if you qualify. Youll have more investment options then.

I invest in straight S&P 500 ETFs.

My suggestion as well. There are plenty of no-load funds out there (Vanguard, Schwab, Fidelity, etc) so there's literally no reason to be using your employer's plan.

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Mark S.Pro Member

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

3y

Quote from @JD Martin:

Quote from @Russell Brazil:

If employer doesnt match, might as well do a standard ira if you qualify. Youll have more investment options then.

I invest in straight S&P 500 ETFs.

My suggestion as well. There are plenty of no-load funds out there (Vanguard, Schwab, Fidelity, etc) so there's literally no reason to be using your employer's plan.

Have you looked into the backdoor Roth IRA?

0 Reply

Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

3y

Agreed with the above responses. You have options just need to find them, open accounts, and start investing.

"limited access to capital until retirement age" - I don't like this statement. I would change that mindset and connect with successful investors in your market.

0 Reply

Daniel Murphy

Financial Advisor · Saint Paul, MN · Member since 2016 · 190 posts · 143 votes

3y

Quote from @Ryan Rabbitt:

Thoughts on why to stop 401k:

- no match benefit

- returns are very low avg. annual ~5.5% last 3 years net of fees

- can only borrow up to 50k from 401k

- limited access to capital until retirement age

Thoughts on why it could be good to invest in ETFs or general securities example instead(SPY) :

- higher returns 9% avg annual last 3 years net of fees

- access to capital - securities backed line of credit (could be used as another form of liquidity to continue purchasing real estate)

- long-term mitigated tax liability - if you never sell the underlying securities and instead use the line of credit as a form of liquidity to purchase assets

It seems like this could be a long-term strategy with limited tax liability. I don't hear many people talking about this as an alternative if your employer is not matching 401k and you want to be more active in your investing approach long term. Do you think this could be a good strategy where are the pitfalls here?

A few thoughts on this...

First, your return comparison is likely not an apples to apples comparison. Usually, you're comparing your 401k portfolio returns (which are usually in a default target date fund) vs SPY. It's like comparing a wide, stable & safe pontoon, to a speedboat. As long as the expenses in the 401k are not abnormally high, investment returns should be similar if you're comparing like investments.

You mentioned you make too much to contribute to a Roth. One benefit you may want to take advantage of with the 401k is the tax deduction. Look at your previous years tax return, then go to your taxable income line. Google "IRS tax rates" for your filing status. If you're at or near an increasing tax bracket, it could make sense to contribute to the 401k just enough to get your taxable income one tax bracket lower. (in fairness, this is not super common).

All that being said, I normally recommend people invest 1st in their 401k to get the employer match. Then to a Roth IRA (neither of these are applicable to you). Next step is to look back at the 401k (for the tax deduction) or a taxable investment account. The taxable investment account will not give you a tax deduction, but you're right. It will be tax-advantaged to you & fully accessible to use for future real estate purchases.

This is a nuanced situation, but you're on the right track with your thinking. Reach out if you have any other questions... I nerd out on this stuff.

1 Reply

Jeremiah Dunakin

Member since 2022 · 186 posts · 192 votes

3y

If your employer doesn’t offer a match. Really no reason to stay with them. Maybe easier on paycheck deductions and taxes. Going with a S&P 500 fund can be a safe easy choice. No stock screenings, no work, set it and forget it, exposure to a broad range of good companies and different sectors of economy.

0 Reply

Huiya Xiao

Investor · Herndon, VA · Member since 2016 · 23 posts · 11 votes

3y

Quote from @Daniel Murphy:

Quote from @Ryan Rabbitt:

Thoughts on why to stop 401k:

- no match benefit

- returns are very low avg. annual ~5.5% last 3 years net of fees

- can only borrow up to 50k from 401k

- limited access to capital until retirement age

Thoughts on why it could be good to invest in ETFs or general securities example instead(SPY) :

- higher returns 9% avg annual last 3 years net of fees

- access to capital - securities backed line of credit (could be used as another form of liquidity to continue purchasing real estate)

- long-term mitigated tax liability - if you never sell the underlying securities and instead use the line of credit as a form of liquidity to purchase assets

It seems like this could be a long-term strategy with limited tax liability. I don't hear many people talking about this as an alternative if your employer is not matching 401k and you want to be more active in your investing approach long term. Do you think this could be a good strategy where are the pitfalls here?

A few thoughts on this...

First, your return comparison is likely not an apples to apples comparison. Usually, you're comparing your 401k portfolio returns (which are usually in a default target date fund) vs SPY. It's like comparing a wide, stable & safe pontoon, to a speedboat. As long as the expenses in the 401k are not abnormally high, investment returns should be similar if you're comparing like investments.

You mentioned you make too much to contribute to a Roth. One benefit you may want to take advantage of with the 401k is the tax deduction. Look at your previous years tax return, then go to your taxable income line. Google "IRS tax rates" for your filing status. If you're at or near an increasing tax bracket, it could make sense to contribute to the 401k just enough to get your taxable income one tax bracket lower. (in fairness, this is not super common).

All that being said, I normally recommend people invest 1st in their 401k to get the employer match. Then to a Roth IRA (neither of these are applicable to you). Next step is to look back at the 401k (for the tax deduction) or a taxable investment account. The taxable investment account will not give you a tax deduction, but you're right. It will be tax-advantaged to you & fully accessible to use for future real estate purchases.

This is a nuanced situation, but you're on the right track with your thinking. Reach out if you have any other questions... I nerd out on this stuff.

I'm in agreement with Daniel Murphy here. Typically in company's 401K plan, there's a large-cap index fund option that more or less tracks SP500's performance. ETF doesn't offer much advantage over mutual fund for retirement account in my opinion, as you don't want to trade often or cash out (unless for emergency).

In general it's recommended to contribute 10-15% of income to retirement account. That's a reliable strategy if you want to continue to work and retire comfortably with a nice sized nestegg. Understandably that's also not the typical real estate investors' goal - most investors want to leave the 9 to 5 job sooner and be financially independent early. Any investment comes with risk though. For me I won't be comfortable with not saving anything for my retirement while working. It will be up to you to decide how much you want to contribute to your retirement fund.

Another point I don't see mentioned here is that you might not want to put all your real estate investing fund in an ETF like SPY. Stock market fluctuates a lot. It averages out about 10% a year historically but can be up or down on any given year. If I'm saving for the down payment for my next real estate investment, I would put the money in a more liquid type of saving or investment product.

0 Reply

Melissa Nash

Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes

3y

what is your time & experience? If you want to be passive or active? That is where you need to start. If you want to be passive then turnkey is easy. I personally love being a passive investor- I don't want to be landlord and have other goals at this point. I have personally renovated over 50 properties in another state without seeing 1 of them.... that was a full time job and very very stressful- that is active investing. I now prefer to buy out of state turnkey that I hold average return is 9-12% yearly on those. And then I also own 5 short term rentals that I manage passively myself. I say passively bc it took a little time to get them to be passive with the right sales/automations set up correctly. So, my point is that you need to see what your goals are and how much time you want to spend. ALL Investing is good... but do you want to create another job for yourself?

0 Reply

Travis Biziorek

Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes

3y

I agree with sentiment here that w/o a match you should find a retirement option that is more flexible.

When I started RE investing in 2019 my employer DID match my contributions. But I still stopped contributing?

Why?

Because I wanted that extra money for real estate. I had a big goal and needed all that cash I could get my hands on.

0 Reply

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

3y

@Ryan Rabbitt If you don’t get a match then I’d be sure to try to diligently set aside some set amount each paycheck in a separate account specifically for future investments. Whether that becomes some sort of Stock/ETF investment or you use it for real estate investing when you have saved enough for a down payment is up to you.

I wouldn’t keep it in your regular account because if you’re like me once it’s in my account I generally spend it.

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

I am often the contrarian and here is another example.

The employer may offer a Roth 401k which has annual limit of $22.5k. This tax free growth is a big benefit especially if you do not qualify for a Roth IRA.

If the employer does not offer a Roth 401k then they 401k is traditional. The first $22.5k contributed to a traditional 401k is tax free. This implies you immediate return is the combined state and federal tax rates. For high compensated people this can be significant immediate return.

If you can afford to do so, contribute $22.5k to your 401k (ideally a Roth 401k).

Good luck

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Ryan Rabbitt:

Hey BP Community - My employer does not match 401k contributions so I'm considering abandoning the contributions altogether and instead investing in something like the SPY ETF on a regular basis. I'm curious if anyone else has tried this approach and to hear your thouhgts. I can no longer contribute to a ROTH IRA and am looking for ways to accumulate more liquidity long-term to continue purchasing rental properties. I have a small real estate portfolio and a long investing horizon as I'm in my early 30s.

Thoughts on why to stop 401k:

- no match benefit

- returns are very low avg. annual ~5.5% last 3 years net of fees

- can only borrow up to 50k from 401k

- limited access to capital until retirement age

Thoughts on why it could be good to invest in ETFs or general securities example instead(SPY) :

- higher returns 9% avg annual last 3 years net of fees

- access to capital - securities backed line of credit (could be used as another form of liquidity to continue purchasing real estate)

- long-term mitigated tax liability - if you never sell the underlying securities and instead use the line of credit as a form of liquidity to purchase assets

It seems like this could be a long-term strategy with limited tax liability. I don't hear many people talking about this as an alternative if your employer is not matching 401k and you want to be more active in your investing approach long term. Do you think this could be a good strategy where are the pitfalls here?

my general comment :
- You could still invest in your company 401k or Roth but with much less percentage
- I have my own portfolio too that's focusing on creating high dividend cash flows
- with high dividend cash flow ranging from 7% to 30%, you literally low your beta to S&P and even possibly hedge the market fluctuation.
- with DCA strategy, we could reduce market volatilty, while idle money can be saved at 5% saving accont.
- my biggest complain to 401k is actually not the employer matching, but lack of diversfication where I can receive high cash flow with low beta structured portfolio.
- for example, although SPY lost 28% their value in 202, but as total return, my portfolio is flat because my dividend income is offsetting the market gain losses.
- what I am trying to say is that, if you are a "professional fund manager", you could create your set of portfolio that could beat the market , in this situation , the 401k is even less important. The 401k is structured mostly for "Average Joe and Mary" outthere. I don't like it personally, but it's there available for you LOL
- Yes, portfolio Line of credit is very important as well. I could literally put 200k in brokerage and receive 80k for the loan with 7% rate, and generate 8%-14$ return from the same investment LOL

0 Reply

Doug Smith

Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes

3y

If they aren't matching, I would chat with a financial advisor about opening an IRA. If you're wanting to put it into real estate, then choose a custodian like Advanta, Provident, Nu-View, Quest, etc that will allow you to truly "self-direct". Be careful of that term as stock brokerages also use that term to mean you get to choose whatever stocks/mutual funds/bonds they allow you to choose. You can't invest in real estate directly or private lend with a stock brokerage. There might be some limitations on what you can put into an IRA if your employer offers a plan...even if it's a crappy one.

0 Reply

Toni Hogan

Member since 2021 · 5 posts · 0 votes

2y

Quote from @Travis Biziorek:

I agree with sentiment here that w/o a match you should find a retirement option that is more flexible.

When I started RE investing in 2019 my employer DID match my contributions. But I still stopped contributing?

Why?

Because I wanted that extra money for real estate. I had a big goal and needed all that cash I could get my hands on.

What was your tax plan with your earnings from your W-2 job from the time you stopped investing in the 401k until you had the funds to purchase real estate? Currently researching my options with discontinuing my 457 contributions (no employer match due to having a state retirement) but I need a plan for the taxes as I don't want to get hit with a large tax bill.

0 Reply

Toni Hogan

Member since 2021 · 5 posts · 0 votes

2y

Quote from @Jeff Nash:

If they do not match the only other consideration if it is available is to do the Roth 401K option. If that is not doable then I would keep your money in the taxable bucket and allocate accordingly.

Hi! Can you please clarify "keep your money in the taxable bucket and allocate accordingly"?

I read this to mean; allocate for what will have to be paid in taxes at the end of the year. Is that correct?

I am a state employee contributing 10% of my pre tax dollars to a 457b and I contribute 7.25% to a state retirement plan - no employer match.

After a little research, I'm learning some early real estate investors with a W-2 job do not contribute to a retirement plan if there is not a company match, but instead put their money toward real estate investing.

What are the best options to prevent from being heavily taxed from the W-2 job without the retirement contribution?

Thanks!

0 Reply

Matt Ruttenberg

Specialist · Grand Rapids, MI · Member since 2020 · 116 posts · 80 votes

2y

Quote from @Ryan Rabbitt:

Hey BP Community - My employer does not match 401k contributions so I'm considering abandoning the contributions altogether and instead investing in something like the SPY ETF on a regular basis. I'm curious if anyone else has tried this approach and to hear your thouhgts. I can no longer contribute to a ROTH IRA and am looking for ways to accumulate more liquidity long-term to continue purchasing rental properties. I have a small real estate portfolio and a long investing horizon as I'm in my early 30s.

Thoughts on why to stop 401k:

- no match benefit

- returns are very low avg. annual ~5.5% last 3 years net of fees

- can only borrow up to 50k from 401k

- limited access to capital until retirement age

Thoughts on why it could be good to invest in ETFs or general securities example instead(SPY) :

- higher returns 9% avg annual last 3 years net of fees

- access to capital - securities backed line of credit (could be used as another form of liquidity to continue purchasing real estate)

- long-term mitigated tax liability - if you never sell the underlying securities and instead use the line of credit as a form of liquidity to purchase assets

It seems like this could be a long-term strategy with limited tax liability. I don't hear many people talking about this as an alternative if your employer is not matching 401k and you want to be more active in your investing approach long term. Do you think this could be a good strategy where are the pitfalls here?

Im a 401k administrator, I'm curious why the returns are low? Who is the record keeper it's invested with? Is there no way to make changes to the plan.

If it's a smaller business, you should be able to ask them to add additional index funds inside the plan.

0 Reply

Deb S.

Investor · Punta Gorda, FL · Member since 2010 · 151 posts · 127 votes

2y

Quote from @Toni Hogan:

Quote from @Jeff Nash:

If they do not match the only other consideration if it is available is to do the Roth 401K option. If that is not doable then I would keep your money in the taxable bucket and allocate accordingly.

Hi! Can you please clarify "keep your money in the taxable bucket and allocate accordingly"?

I read this to mean; allocate for what will have to be paid in taxes at the end of the year. Is that correct?

I am a state employee contributing 10% of my pre tax dollars to a 457b and I contribute 7.25% to a state retirement plan - no employer match.

After a little research, I'm learning some early real estate investors with a W-2 job do not contribute to a retirement plan if there is not a company match, but instead put their money toward real estate investing.

What are the best options to prevent from being heavily taxed from the W-2 job without the retirement contribution?

Thanks!

Hi Toni,

I'd like to point out that the annual tax savings from contributing to a retirement account in your working years is tiny compared to the tax bill you will have to pay on that 'pre-tax' retirement account.

Why? Because after contributing for 20 or 30 years, the account value has grown substantially (at least we hope so). When retired and now want to withdraw those funds, you will be paying taxes on whatever amount you withdraw every year AND after age 72 will have to take RMD (required minimum distributions) whether you want to withdraw money or not! Otherwise, the IRS will penalize you.

See attached pic for an example.

I show people how to use permanent life insurance to supplement retirement with tax-free income. If you'd like to know more, send me message and I can explain. It's a lot to put here.

1 Reply

Wesley I.

Investor · San Diego, CA · Member since 2019 · 286 posts · 135 votes

2y

@Ryan Rabbitt

Thats pretty low returns for your 401k, maybe look into other options that your custodian offers. Ask around coworkers to see where they invest theirs.

Second the idea of a Roth 401k.

You mentioned that you dont qualify for a Roth, so your income must be above the phase out limit. More reasons to contribute to a traditional retirement accounts to reduce your taxable income.

If you have an HSA account contribute to that as well.

0 Reply

Mark S.Pro Member

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

2y

Quote from @Deb S.:

Quote from @Toni Hogan:

Quote from @Jeff Nash:

If they do not match the only other consideration if it is available is to do the Roth 401K option. If that is not doable then I would keep your money in the taxable bucket and allocate accordingly.

Hi! Can you please clarify "keep your money in the taxable bucket and allocate accordingly"?

I read this to mean; allocate for what will have to be paid in taxes at the end of the year. Is that correct?

I am a state employee contributing 10% of my pre tax dollars to a 457b and I contribute 7.25% to a state retirement plan - no employer match.

After a little research, I'm learning some early real estate investors with a W-2 job do not contribute to a retirement plan if there is not a company match, but instead put their money toward real estate investing.

What are the best options to prevent from being heavily taxed from the W-2 job without the retirement contribution?

Thanks!

Hi Toni,

I'd like to point out that the annual tax savings from contributing to a retirement account in your working years is tiny compared to the tax bill you will have to pay on that 'pre-tax' retirement account.

Why? Because after contributing for 20 or 30 years, the account value has grown substantially (at least we hope so). When retired and now want to withdraw those funds, you will be paying taxes on whatever amount you withdraw every year AND after age 72 will have to take RMD (required minimum distributions) whether you want to withdraw money or not! Otherwise, the IRS will penalize you.

See attached pic for an example.

I show people how to use permanent life insurance to supplement retirement with tax-free income. If you'd like to know more, send me message and I can explain. It's a lot to put here.

Stop the nonsense.

0 Reply

Deb S.

Investor · Punta Gorda, FL · Member since 2010 · 151 posts · 127 votes

2y

Quote from @Mark S.:

Quote from @Deb S.:

Quote from @Toni Hogan:

Quote from @Jeff Nash:

If they do not match the only other consideration if it is available is to do the Roth 401K option. If that is not doable then I would keep your money in the taxable bucket and allocate accordingly.

Hi! Can you please clarify "keep your money in the taxable bucket and allocate accordingly"?

I read this to mean; allocate for what will have to be paid in taxes at the end of the year. Is that correct?

I am a state employee contributing 10% of my pre tax dollars to a 457b and I contribute 7.25% to a state retirement plan - no employer match.

After a little research, I'm learning some early real estate investors with a W-2 job do not contribute to a retirement plan if there is not a company match, but instead put their money toward real estate investing.

What are the best options to prevent from being heavily taxed from the W-2 job without the retirement contribution?

Thanks!

Hi Toni,

I'd like to point out that the annual tax savings from contributing to a retirement account in your working years is tiny compared to the tax bill you will have to pay on that 'pre-tax' retirement account.

Why? Because after contributing for 20 or 30 years, the account value has grown substantially (at least we hope so). When retired and now want to withdraw those funds, you will be paying taxes on whatever amount you withdraw every year AND after age 72 will have to take RMD (required minimum distributions) whether you want to withdraw money or not! Otherwise, the IRS will penalize you.

See attached pic for an example.

I show people how to use permanent life insurance to supplement retirement with tax-free income. If you'd like to know more, send me message and I can explain. It's a lot to put here.

Stop the nonsense.

What nonsense?

0 Reply

John BowensBusiness Member

Investor · Member since 2024 · 44 posts · 36 votes

1y

That is very unfortunate to hear they don't match and makes sense why you are considering not contributing. Here are some pros and cons to help you. Your decisions might also be based on how long you plan on staying at that employer. If it is only lets say 2-3 years, at least you know you can roll out your money in 2-3 years when you leave, opposed to maybe many years into the future. Here are some pros and cons to try and help you:

PROS:

1) Despite no match, you are still contributing to a 401k, which carries unique tax-advantages (Tax-deferred or in the case of Roth, tax-free growth). Keep in mind, there are contribution limits every year, so the more you can contribute the better in most cases.

2) You can max out your 401k contribution and IRA contribution every year, providing you have enough earned income. When under the age of 50, for 2024, you can contribute $7,000 when under the age of 50, and $8,000 when 50+ to an IRA. Then 401k, $23,000 when under 50 and $30,500 when 50+. If you want tax-deductions now you might contribute to the pre-tax bucket and get a deductions, or if you want tax-free growth and tax-free distributions, you will look at contributing to Roth bucket, or maybe you do some to pre-tax and some to post tax Roth.

3) Simply put, Compounding Interest In the Absence of Taxation! Very powerful!

4) 401ks have unique creditor protections and probate avoidance.

CONS:

1) You will be limited with investing options in 401k, likely only to Mutual Funds, not real estate, etc.

2) You can't move your money while still working. Although if really needed, you could borrow against 401k, up to $50,000, not to exceed 50% of balance.

3) You have less money in your bank account for real estate, and instead held in a retirement account that only allows for stock market based investments.

There are always tradeoffs in the game of investing and tax strategy. That said, think about the long-term impacts of compounding interest in the absence of taxation!

0 Reply

Mark S.Pro Member

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

1y

Quote from @Deb S.:

Quote from @Mark S.:

Quote from @Deb S.:

Quote from @Toni Hogan:

Quote from @Jeff Nash:

If they do not match the only other consideration if it is available is to do the Roth 401K option. If that is not doable then I would keep your money in the taxable bucket and allocate accordingly.

Hi! Can you please clarify "keep your money in the taxable bucket and allocate accordingly"?

I read this to mean; allocate for what will have to be paid in taxes at the end of the year. Is that correct?

I am a state employee contributing 10% of my pre tax dollars to a 457b and I contribute 7.25% to a state retirement plan - no employer match.

After a little research, I'm learning some early real estate investors with a W-2 job do not contribute to a retirement plan if there is not a company match, but instead put their money toward real estate investing.

What are the best options to prevent from being heavily taxed from the W-2 job without the retirement contribution?

Thanks!

Hi Toni,

I'd like to point out that the annual tax savings from contributing to a retirement account in your working years is tiny compared to the tax bill you will have to pay on that 'pre-tax' retirement account.

Why? Because after contributing for 20 or 30 years, the account value has grown substantially (at least we hope so). When retired and now want to withdraw those funds, you will be paying taxes on whatever amount you withdraw every year AND after age 72 will have to take RMD (required minimum distributions) whether you want to withdraw money or not! Otherwise, the IRS will penalize you.

See attached pic for an example.

I show people how to use permanent life insurance to supplement retirement with tax-free income. If you'd like to know more, send me message and I can explain. It's a lot to put here.

Stop the nonsense.

What nonsense?

Your post. Nonsense.

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Employer does not match 401k - should I invest?

Employer does not match 401k - should I invest?

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