Are you Pro or Against 401(k)?
Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesAre you Pro or Against 401(k)?
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Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
11yI'm pro 401(k) when there is an employee match on offer. No one who has an employee match through their employer should ever contribute less than that which is required to get the match; that is just giving away money.
As for the tax deferral question, I am personally more in favor of the Roth approach. Yes, my tax bracket is higher now than it will be after retirement. But I have no confidence that our current (pretty reasonable) brackets will still be in place in 25 years. To take advantage of a tool that eliminates future tax liability entirely strikes me as a very, very good bet.
More broadly, I have noticed that BiggerPockets is full of fanatics. Diversification is almost a foreign concept here, and there are quite a few people who will tell you that putting money into anything but real estate is foolish. I think some of those people are very, very sophisticated real estate investors who do this full-time and with great success, and that most if not all of the rest are fools.
I personally plan on working productively and earning a high income until after 59, and living WELL PAST 59, so the withdrawal issue is fine with me.
197 Replies
- Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes11y
Originally posted by @Account Closed:
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/)
Jon,
Here I use 401(k) somewhat interchangeably with "tax deferred retirement plan". Why not invest in one of these plans, and then go for that fund with the 20% return, or real estate, etc? I get to become an accredited investor sooner, which gives me access to the fund, and as a bonus, my money grows tax free. Sounds like a pretty good plan to give you the most opportunity the soonest!
-Scott
- Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes11y
Your post wasn't clear. Are you saying use a self-directed IRA or Solo 401k? If so, my suggestion would be as follows:
If you would like to stay in corporate America: Yes, it might make sense, but consider all your investment options to ensure you're making the right decision for yourself. I have investor friends who are making 25%+ returns in real estate and want direct access to the money, so these plans wouldn't work for them.
If you plan to leave corporate America and become a full-time investor: No, probably doesn't make sense because you will not be relying on your "retirement plan" for retirement. You'll be retiring on the millions you'll make as a real estate investor. - Minneapolis, MN · Member since 2014 · 332 posts · 288 votes11y
@Scott Trench perhaps I missed it somewhere else in this thread, but do you also invest in real estate? If so, disregard the rest of my post.
I agree with @Account Closed above that your post is a bit misleading. I am extremely confused by your claim that investing in a 401k is the best way to grow your net worth. In fact, it's one of the SLOWEST and in my opinion, riskiest. Did you have a 401k in 2008 or 2009? Have you recovered those gains yet?
If you are investing in your 401k as a compliment to your real estate investing, that is one thing, but saying a 401k is the best way to increase your net worth is harming to newbies.
For one, you can only contribute $17,500 per year to a 401k. You can do one small real estate deal in a year and make more than that. Imagine if you did 2, 3, 4, etc deals per year and banked all that money? Your net worth would be MUCH, MUCH higher than the $17,500 max you put in your 401k, even if it grew 20% that year.
- Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes11y
I max out our Roth IRA's and keep cash on hand. I was putting money into our TSP's (no employer match) and a brokerage account with ETF's, but decided to divert all those cash contributions into real estate while interest rates are cheap. When rates go back up, I'll divert some of that cash back into the TSP's. Having decent sized balances in the tax deferred accounts helps with lending as well. My loan officer always smiles when she sees my tax deferred account balances.
- Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes11y
You can build wealth in pre-tax accounts. About 9,000 U.S. taxpayers have each accumulated at least $5 million in individual retirement accounts. This doesn't include 401(k)'s. which have higher contribution limits and often more employer matching. Google "Mitt Romney IRA" to get a sense of what is possible with a strategic approach.
An IRA or 401(k) isn't an investment, but are pre-tax vehicles in which to hold investments, including real estate in some cases. This may be obvious, but some posters are implying that they exclude real estate.
- Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes11y
Originally posted by @Account Closed:
@Scott Trench perhaps I missed it somewhere else in this thread, but do you also invest in real estate? If so, disregard the rest of my post.
I agree with @Account Closed above that your post is a bit misleading. I am extremely confused by your claim that investing in a 401k is the best way to grow your net worth. In fact, it's one of the SLOWEST and in my opinion, riskiest. Did you have a 401k in 2008 or 2009? Have you recovered those gains yet?
If you are investing in your 401k as a compliment to your real estate investing, that is one thing, but saying a 401k is the best way to increase your net worth is harming to newbies.
For one, you can only contribute $17,500 per year to a 401k. You can do one small real estate deal in a year and make more than that. Imagine if you did 2, 3, 4, etc deals per year and banked all that money? Your net worth would be MUCH, MUCH higher than the $17,500 max you put in your 401k, even if it grew 20% that year.
Sean,
As a youngster one year out of college, I am buying my first duplex (owner occupier) and plan to close in the next two weeks. I also max out a 401(k) and would like to max a Roth, but won't be able to quite do all three this year ;). I believe that the 401(k) is extremely fast and an extremely important tool for newbies and experts alike for the following two reasons:
1) It reduces your tax bill this year - at $100,000 joint salary, a married couple contributing $17,500 reduces their tax bill by $4,375, which in essence can be thought of as a direct contribution to their net worth - a 25% immediate real return even assuming no employer match. Further, even in an index fund, if you get 7% on average, this totals to a 32% return your first year tax free.
2) You can move 401(k) funds into self-directed IRAs and still invest in Real Estate with 401(k) money. I find it difficult to believe that most newbies can beat the 32% return I describe above while working a full time corporate job, but if they do quit and invest full time or become self employed, they can certainly use the money towards those super profitable real estate investments.
- Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes11y
@Account Closed
Assumption 1: 401k is extremely fast.
I'm not understanding how an average return of 5% (if you're lucky) is a FAST way to built wealth. I believe that you CANNOT get wealthy by working for your money. You get wealthy by having your money work for you, (ie. OWNERSHIP).
Assumption 2: you're going to cash out your 401k when you retire. If you do not hold it until retirement, you're tax free status and 32% return you quote above will be significantly less.
If you're money is tied up in a 401k, you cannot get access to it unless you remove it. Even with a self-directed IRA, you cannot access the money. All profits go back into your retirement account.
Most newbies aren't able to generate 32% returns. It's unlikely that you will be able to as well consistently by investing in a 401k.
FYI: at age 25, I was generating consistent 20% returns from real estate with the money I could have put in my 401k. So it is POSSIBLE if you are a continuous learning and are driven to generate very high returns in real estate.
- Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes11y
@Scott Trench how many years do you calculate it will take you to be a "401k millionaire"? This is a quote from Fidelity:
"But while rare, 401(k) millionaires aren’t purely theoretical creatures. Among the 12 million people with 401(k) accounts managed by Fidelity Investments, for example, about 50,000, or 0.4%, have balances of seven figures or more."
If you do some studying on the subject you'll find it takes a lifetime of disciplined investing with a market that increases in value. We have had a bull market long-term which has allowed these investors to thrive. Pretty pathetic if you ask me.
- Real Estate Investor · Alexandria, LA · Member since 2014 · 70 posts · 18 votes11y
in my opinion, 401k's should be a part of most people retirement portfolio. Here is this reason why "Compounding Interest." If anyone runs a retirement simulation they would see that for the average person the 401k program can not be beat. Example of what I did at my job I worked to max out 401k, 17,500 yearly, after I accomplished this I started investing in real estate. Yes, I started investing in real estate a little late (31), but I will be a millionaire because of 401k around the age of 48. Now all of this also depends on your retirement goals.
- New York City, NY · Member since 2013 · 136 posts · 76 votes11y
Pro, to me it's not even a question. That being said, some people don't get that real estate and 401(k)s are not mutually exclusive.
100% return on my employer match, and an instant return of my marginal tax rate, which is nearly 50%. I can't think of a single other vehicle that can do that and return a conservative 7% year-on-year on average. It's a no brainer.
- 11yDavid HollandPro MemberRealtor · Baltimore, MD · Member since 2013 · 91 posts · 32 votes
I think anyone who has a employer matching 401k should put in the minimum amount to get the full benefit. Its free money. You shouldn't miss 5% of your paycheck.
I was putting in 12% with 5% match from the gov't for my TSP. Now I have a Roth checkbook SD-IRA that I max out and went from 12% down to 5%. If if makes sense to add more or top off my 401k for the year for tax purposes I will do it.
As mentioned, being able to take a personal loan of up to half your 401k is a great way to fund deals. I just did it and have to pay MYSELF 2.5% interest over 5yrs.
- Real Estate Investor · Springfield, SD · Member since 2013 · 5 posts · 3 votes11y
Pro 401(k)
In 16 years my 401(k) was worth $600,000, the power company I worked for cashed my retirement out at $500,000, so I quit, put all that money in my own Profit Sharing Plan and am now investing overseas and locally in real estate, gold, and old cars (59 caddys). No custodians required. Profits aren't taxed until I take some out for personal use, so they just keep earning more and more. They are taxed at full rate, but last year, I took so little out that I qualified for the earned income tax credit!
- Developer / Investor · Denver, CO · Member since 2014 · 64 posts · 31 votes11y
What a great post. Anyone with an employer match that is not grabbing that up is leaving cash on the table. You can bet your employer uses that money to calculate your total cost to the company, so you might as well take them up on it.
There is a mindset out there called "the power of and vs. the tyranny of or." Here's a link
https://bizcircle.att.com/articles/power-versus-tyranny/#fbid=ANKkm5yLkk4
I offer a very different take on how you can contribute to a tax sheltered employer sponsored account AND use that money for RE deals. Payam Dastmalchi touched briefly on it in his post and I'll expand.
Recently, I put together a smashing deal (165% COCR) and to fund my portion of it, I took a loan out of my TSP (my day job is a Fed.) While the project was progressing I made loan payments to myself (at 4% interest) and when the deal closed, I paid off the remaining balance of my loan, and because I was making payments the whole time, the amount required to pay off the loan was less than the starting balance, so I had a few extra dollars of cash in my pocket.
Did I lose out on the gains while my loan was out, yep, sure did. Where the gains even close to what I made on the RE deal, nope. Did I take advantage of my employer contributions, yep, did I increase my net worth both in the stock market and in real estate, yep.
You'll notice there are a lot of "ands" in my statement above.
Now I will caution everyone with this, there are some very specific nuances that you need to abide by if you want to use money tied up in your 401k/TSP for loan purposes and not run a foul of the IRS. Anyone intersted in the details of what I did, I would be more than happy to share. Just send me a message.
- 11yBrian EastmanPro MemberSelf Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
@Scott Trench,
You really created a lively discussion with this question.
I am a strong proponent of using the gift of tax deferral to grow retirement wealth. Because the contributions you make a 401(k) are pre-tax (or potentially Roth), and because the investment gains are generally not taxed until you take distributions in retirement, the amount of wealth you can acquire is significantly boosted. Think of the tax sheltering in the same way you would leverage on a real estate deal - it supercharges your cash-on-cash returns.
The comments about employer matches are spot-on if you work for an employer. Free money is good, period. If you are the employer, and have no employees, a Solo 401(k) is a wonderful tool as well.
With a self directed Solo 401(k), you can have the best of both worlds - the ability to set aside income into the plan on a tax deferred or Roth basis as well as the freedom to invest in real estate and achieve the types of superior results we all like to brag about here on the BP forums.
Many of my clients have a 401(k) through their employer as well as a Solo 401(k) sponsored by their personal real estate business. They contribute just enough in the employer plan to max out the employer match, and then defer some of the income they receive from flipping houses personally into their own Solo 401(k), thus reducing their tax exposure in that enterprise. The employee contribution limit of $17,000 for investors under age 50 or $23,000 is split across the two plans, but the Solo 401(k) can accept profit sharing contributions independently of what may be occurring in the other plan. The icing on the cake is when they take the tax-sheltered funds in the Solo 401(k) and put those into passive real estate investments such as rentals or notes.
I must, however, throw a bit of cold water on comments touting the benefits of taking a loan from your 401(k) or other qualified retirement plan in order to invest in real estate. The factor most folks miss is that you are giving up on the initial savings achieved when you made pre-tax contributions to your 401(k). Sure, you can borrow from the plan without taxes or penalties at a low interest rate, but you are repaying the loan with after-tax dollars. If you are in the 28% tax bracket and borrow $50,000 from your plan, it effectively takes $69,000 of new earnings to repay the note - not including the interest. Most hard-money lenders charge a lot less.
- Commercial Real Estate Agent · Sudbury, MA · Member since 2014 · 118 posts · 25 votes11y
I am pro Good 401(k)s and anti Bad 401(k)s.
The difference is night and day. My company 401(k) offered a dollar for dollar match on the first 6% of income deposited. So a $60K salary with $3600 deposit would see $7200 added each year. The S&P offering has a .02% expense. 50 years' expenses would add to just 1%. This is an example of a great plan.
Bad plans would have lower matches or none at all, and fees any higher than about 1/2%. Really bad plans are over 1%, and with no match, I wouldn't deposit to them at all. There are plans that charge 2%. This level of fee should be considered criminal, in my opinion.
Of course, if one wants to invest big time in real estate, the company 401(k) isn't going to help with cash, but for job changers, this can be moved to a self-directed IRA.
- Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes11y
Originally posted by @Brian Eastman:
@Scott Trench,
Many of my clients have a 401(k) through their employer as well as a Solo 401(k) sponsored by their personal real estate business. They contribute just enough in the employer plan to max out the employer match, and then defer some of the income they receive from flipping houses personally into their own Solo 401(k), thus reducing their tax exposure in that enterprise. The employee contribution limit of $17,000 for investors under age 50 or $23,000 is split across the two plans, but the Solo 401(k) can accept profit sharing contributions independently of what may be occurring in the other plan. The icing on the cake is when they take the tax-sheltered funds in the Solo 401(k) and put those into passive real estate investments such as rentals or notes.
Wow, am I learning a lot here. This is fantastic - I think that this example demonstrates the amazing power of strategically deploying tax deferred retirement plans. Truly amazing. Thank you for your input and I will certainly be developing this strategy as I grow my REI portfolio going forward.
- New to Real Estate · Grand Rapids, MI · Member since 2013 · 8 posts · 1 vote11y
*Disclaimer* I am only 21, and don't have that much life experience. If anything I say is wrong or if you can provide me with any additional knowledge I would love to hear it. I'm here to learn!
I feel this topic is mostly circumstantial. Whether you are pro or anti 401k depends on your own personal preferences and life situations you are in (as is everything in life)
If you work for a company that provides a match I definitely recommend taking advantage of it, especially if it is a good match. For example, I work for a financial institution here in the Lansing, MI area and they match 200% up to a max 5% contribution I make. However, if your company does not offer this, or you are self-employed and feel that your money can be used elsewhere and make better gains, then do it what makes you happy.
I personally am pro-401k, however. I believe in diversification, as well as taking advantage of the match my employer makes. They are paying me to save. It is a less liquid form of savings, but I think it is important to save for the future.
Remember, you can also borrow against your 401k if need be (say a really sweet deal comes along) and the benefit of that is you pay yourself back. There are also those qualified reasons for penalty free withdrawals that you can take before the age of 59 1/2.
I personally chose a Roth 401k because I am in a lower tax bracket, and so I prefer to pay my taxes now rather than later!
- Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes11y
@Walt Payne you are thinking exactly how the government wants you to think.
I think it can be politically difficult to raise income tax rates, but its not as hard to raise fees, sales taxes, gas taxes etc... so they money you volunteered to pay taxes on early, so you had less to invest, will be taxed again when you try to use it.
I firmly believe the first 50,000 of income will be taxed very low for a long time to come. With no pensions, and minimal(or zero) social security due to means testing, most of my never-taxed 401k contributions will be taxed at near zero when they come back out.
I will never volunteer to pay a tax today that I can avoid or defer. We can only be 100% certain about what today's tax policy is.
- Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes11y
Great discussion here! Love it!
While I love REI, I also love a good savings/retirement vehicle! The Corp. 401k is a great option if given to you. As others have stated yoaa re essentially turning down "FREE" money with the company match option if offered. At the very minimum one should contribute to get the max Company match. I take it a step further and opt. to max out my 401k from my W-2 income and here is just 1 of the reasons why....
As we know the 401k contribution is pre tax allowing a full deduction, as we also know as RE investors when you hit a certain threshold in W-2 income I believe it is 150k, (starts to get phased out at 100k) you lose the 25k passive loss deduction from your passive RE investing activities. Well now you can basically make another 17,500 before losing that valuable 25k deduction in same tax year!
I love RE and consider myself an investor/landlord and invest heavily in it, but I also feel I want to be diversified and invest in quality blue chip, high dividend yielding/paying secutities as well. (I LOVE PASSIVE INCOME) So being I have nice income from my RE holdings this allows me to max out my work 401k and my personal roth IRA as well.
If I had to choose one or the other I would go with RE as it has created more wealth for my hands down along withteh amazing tax benefits it provides, however opportunities like a 401k plan and a Roth IRA should also be taken advantage of.
best regards,
Chris
As mentioned my goal is to create wealth and passive income over time so eventually these things (my RE income and my portfolio income will replace my W-2 income) and hey of social security is still aaround in 25 years when I get there that is just a bonus but I am definitely not counting on it!
- Pittsburgh, PA · Member since 2014 · 79 posts · 70 votes11y
Pro 401k.
The balance on my very first 401k statement was $26.70. 20 years later and my current balance is $193,479. Those "Against" would be interested to know my contributions so they could demonstrate what they could have achieved in real estate.
None of which is relevant to the point I am about to make. I never missed the money that I contributed, nor did I have to take an active roll in investing it. I diversified it into 4 Index Funds, with the majority of it going into one that matches the S&P 500. All done tax free.
- Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes11y
Can you post a photo of your 59 caddys?
- Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes11y
Originally posted by @Account Closed:
Can you post a photo of your 59 caddys?
I think I found 50 of them:
- Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes11y
Originally posted by @Scott Trench:
Originally posted by @Account Closed:
Can you post a photo of your 59 caddys?
I think I found 50 of them:
Looks like Mary Kay headquarters in Plano, Texas. A very nice real estate market.
- Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes11y
Thanks @Scott Trench !
I was looking forward to seeing some of the classic caddy's. Pink Mary Kay Caddy's are less my style :-)
Yes @Jon Klaus a good market. Did they put in the new train station yet? They were building a new rail line when I was investing in Plano in 2011 (no longer buying in this market).
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