Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
Two questions for anyone willing to help a newbie.
1) what is the point of a roth or traditional IRA if you can only add 5000 to it each year. I am 30 so that means I have 29.5 years I can add to it. If my math is correct that means I will have $147,500.00 in there by the time I retire at 59.5. How am I suppose to survive the next 30 years on $147,500.00?
I currently have a "roll over IRA" which was at one point a 401(k) when I was an employee.
2) I would like to open up a stock trading account where I can buy dividend paying stocks with my roll over IRA. I would like to add the dividends to my current monthly income. Is this possible to do? Is it a horrible idea tax wise? Is the tax rate on dividends really high? I currently only make 70k a year as a sole proprietor with all my income in the form of commissions.
Rental Property Investor · Jacksonville, FL · Member since 2016 · 91 posts · 70 votes
9y
Rich Hupper contributing $5500(the max) to an IRA each year and assuming 8% compounding interest is actually 728k after 30 years. That's not so bad anymore!
Rental Property Investor · Jacksonville, FL · Member since 2016 · 91 posts · 70 votes
9y
Rich Hupper as to your second question, the whole point of an IRA is the tax deferrable part. You are penalized for withdrawing dividends from an IRA account. It works much better to reinvest them. I know your thinking was to increase passive income now, but an IRA is much more beneficial later rather than now.
Rental Property Investor · Jacksonville, FL · Member since 2016 · 91 posts · 70 votes
9y
Rich Hupper 8% is just a benchmark of what the stock market has averaged over the last 30 years or so. You portfolio could do better or worse than that in the future.
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
9y
Thank you for your help. If I am looking to invest some of my 70k a year commission income in dividend paying stocks where I can add the dividends to my monthly income what type of account would that be, and how much would I be taxed on those dividends?
Rental Property Investor · Jacksonville, FL · Member since 2016 · 91 posts · 70 votes
9y
@Rich Hupper it sounds like you want to go invest in high dividend yielding ETF's in just any online brokerage then. I use Robinhood because they take zero commission.
But as others have said, this is a slow way to build wealth and there are probably better options for your 70k. Or maybe we're just bias on a real estate forum lol
Question 1) The point of an IRA is to use tax advantages offered by the government in two types of vehicles:
1) Traditional IRA - Tax deferred growth (save taxes now, pay them when you withdraw)
2) Roth IRA - Tax-free growth (pay taxes now, investments grow tax-free into the future)
Two things about your contribution amounts. Yes, you can only invest $5,500 total into IRA's over the next 29.5 years (you can still contribute to 2016's tax year now though). However, this maximum contribution increases with inflation. It used to be $5,000 per year, now it's $5,500 per year and will be increased in the future so your contributions won't be $5,500 per year forever. I agree with you though, it's not an amount to write home about in the grand scheme of things.
Question 2) If the money in your roll-over IRA is what you plan to invest with, you can't add that to your monthly income. That money is locked away in your IRA account unless you want to pay the 10% penalty and pay income tax on that amount. If you want to start generating monthly income from dividend paying stocks, you'll need to open a general brokerage (on E-Trade, Vanguard, Fidelity, etc.) account which you will pay taxes on the earnings/capital gains. This income won't kill you from a tax perspective but you'd be wise to just reinvest your dividends for now until you're a bit older as those dividends can continue to grow your portfolio vs. fund your lifestyle now.
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
9y
@James Triano Perfect. Thanks a lot. Since my IRA dividends are locked away I plan on only buying different stocks with them. Or should I have them automatically buy more of the stock they are coming from.
Many people feel that self-directed IRAs and 401ks are a great way to get benefits from both worlds: the tax advantages of a retirement account plus the asset flexibility to invest in what you want. @Patrick Connell was on point with this.
I think a Solo 401k plan is a perfect tool for real estate agents and brokers. Why not have (at least a portion of) your retirement money in the assets you sell rather than the stock market?
So it appears that no one uses dividends for month to month passive income like they would rental property. Is this because it can only be tax sheltered in a tax exempt retirement account or because the income is too small?
Are you talking about dividends from traditional assets such as stocks? If so, then yes, in a lot of cases the income is too small and/or it is in an IRA or 401k which is not for personal income now, but for tax-advantaged growth now and income in retirement. I think the main reason stocks are so common inside retirement accounts is that most of the accounts have traditional assets as their ONLY option.
Of course there are those with a large enough stock portfolio outside of their retirement accounts to generate significant dividends, but that's probably a minority of folks, especially on a real estate investing forum.
Rental Property Investor · Jacksonville, FL · Member since 2016 · 91 posts · 70 votes
9y
@Rich Hupper no catch to Robinhood. They just don't provide all the bells and whistles like research that others may provide.
I still agree with the others. You'd need about 1million in an account just to make like 2500 a month off of dividends. As I'm sure you know, a million in capital can produce a lot more income than that through real estate.
You can really do either. You can re-invest your dividends into the companies that produced them (easiest) or re-invest into other assets. I would recommend just re-investing into the companies that paid you dividends because this can just be automated through your broker. It will make your life easier as your portfolio grows.
So it appears that no one uses dividends for month to month passive income like they would rental property. Is this because it can only be tax sheltered in a tax exempt retirement account or because the income is too small?
Another unknown with dividends is they may stop paying them at any given time and at their discretion. You could go ten years counting on that money and out of the blue they cancel it. You would have no say in it either.
There is nothing wrong with an employee 401k. I have one now. As long as my employer is going to give me free money every week just for saving who am I to judge them? But when I get laid off (work construction so I am very used to it) that money goes into my solo k for real estate. After I retire for good I may move some back into blue chip dividend stock. I may not. Depends on what looks good then.
I guess what I am trying to say is don't put all your eggs in the same basket. The fact that you are here asking these questions is a good thing. You will find what is right for you.
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
9y
@Mike Reynolds Thanks Mike. I love intelligent forums like this and reading books pretty much how I got to where I am today. Investing in securities is very foreign to me hence why I am starting the discussions. Can you tell me what a blue chip dividend stock is?
construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
9y
@Rich Hupper Sure. Its the larger companies like Apple, IBM, Exxon and Walmart. They are strong companies that usually pay regular dividends. They got the name blue chip because that was the highest denomination poker chip back In the day.
If you want your IRA to grow to give you a comfortable retirement you need to be looking for great investments. And if the great investments yield great returns the best kind of IRA is a Roth IRA so you never have to pay taxes on those returns.
How great would it be to take your $5500 IRA contribution and invest it and make 300% in six months? Then rinse and repeat. The contribution portion of your IRA quickly becomes the smaller part of your retirement nest-egg.
The founder of Paypal, Peter Thiel, used his Roth IRA to execute on his Paypal options, made tons tax free, then used those gains to invest in Facebook. Now has something like $3B in his Roth- Tax free forever! Max Levchin's (Yelp) story is similar.
Obviously, most of us don't have Thiels Paypal or Facebook opportunities, but lots of real estate investments will get you supercharged yields. My favorite right now in non-performing notes. Just wrote a blog post on the topic- Rental Property Acquisition via Non-performing notes- Birm, AL study. You have to be careful with your IRA investing- you can't contribute money from outside your IRA to your investment when extra costs pop up (and they usually do.)
And the quick answer to your second question is- no, you can't use your IRA investments to supplement your regular income unless you are over 59 1/2. Although, if your IRA is a ROTH, you can withdraw CONTRIBUTIONS any time without penalty- you could withdraw an amount of your contribution equal to your dividend proceeds. But then your retirement nestegg doesn't grow as well.
Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
9y
@Rich Hupper Rich, it sounds like your questions have been answered but I wanted to echo Zak and Justin and reiterate that you are posting in a forum dedicated to real estate investing. If you posted on Bogleheads, you'd have a bunch of people telling you to open a Roth IRA at Vanguard and invest everything in index funds. When you have a hammer, everything looks like a nail.
LOTS of wealthy and/or retired people live off of passive income from stock dividends and bond interest. They are just not people that post on Bigger Pockets.
I think real estate is an interesting asset class, which is why I am here. But it is not the only thing I invest in. I believe it is unwise to bet everything on one asset class.