Stop contributing to my 401k?

Question

I currently contribute 6% of my salary with a 3% match. I feel that the 6% I am contributing can be better leveraged through REI right now to build up my RE portfolio. Thoughts?

Brian Eastman · Answer

@Michael Bickel

While you would probably be happier investing that money in real estate, you give up a good amount of benefit in exchange.

When you contribute your 6%, that is pre-tax.  So, you are effectively getting a match from the Federal and State governments equal to your tax rate.  That is probably a 30-35% ROI right out of the gate, in effect.

Your employer match is also free money, which you can also look at as immediate ROI every time you set money aside into your plan.

If you do not make the contributions, you will have perhaps $4,000 in personally available cash to invest in real estate, as opposed to perhaps $8,500 - $10,000 in your 401k plan.  (just estimates, not knowing your tax rates, but you get the idea).

How much better does your ROI need to be in real estate to make that up?

Eventually, you will change jobs or retire.  Then you can move the accumulated wealth you have created in your 401k into real estate with a self-directed IRA, and receive the gains from real estate investing tax-sheltered into that retirement plan.

Big picture thinking is the best strategy sometimes.

Dmitriy Fomichenko · Answer

I agree that you should at least take advantage of the employer match. It is essentially guaranteed money that you can hardly get with any other investment. Even though you probably have limited investment options with your 401k right now, there is always the option to roll it over to an IRA when you leave the job. Then, you can have the best of both worlds, investing in real estate with the tax-advantaged account.