Employer does not match 401k - should I invest?

[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? 

[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.

[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.  

[Robere Istatia]

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. 

[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. 

[Mark S.]

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?  

[Jaron Walling]

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.  

[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. 

[Jeremiah Dunakin]

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. 

[Huiya Xiao]

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.

[Melissa Nash]

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? 

[Travis B.]

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. 

[Alecia Loveless]

@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.

[Dan Heuschele]

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

[Carlos Ptriawan]

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

[Doug Smith]

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.