Schaghticoke, NY · Member since 2015 · 216 posts · 57 votes
I've been listening to Set for Life, by @Scott Trench. Great book! One of the things discussed in the book is how a 401k locks up part of your income, and that if you aspire to reach early financial freedom then a 401k slows you down because you cannot access part of your income.
I'm 27 years old and about 3.5 years post-college. About 7 months ago I changed jobs, and I was able to cash out my 401k instead of rolling it over to my new employer. I restarted a 401k with my new employer and currently only have about $900 in the account, so I wouldn't be taking a huge penalty hit or anything like that. I contribute $42/week, which seems pretty significant on a monthly or annual basis. Should I kill my 401k so that I can access this $42/week? Another $168/month does sound really nice, and I do plan to grow a portfolio of rental properties to support myself and my family. I have one duplex currently and I'm under contract for my second.
minneapolis, MN · Member since 2017 · 79 posts · 92 votes
8y
401k's are a scam invented by wallstreet lobbyists. Obviously I'm being obtuse, but the reality is that as an investor, you can make much better use of this money than it can sitting for 40 years in a financial mgmt company's account.
To hell with employer match. To hell with tax deferment. To hell with diversification. REAL estate. Emphasis on the "Real".
Rental Property Investor · San Diego, CA · Member since 2008 · 89 posts · 65 votes
8y
As others have mentioned, do what fits your situation. I invest in real estate, max out the 401K ($18.5k), and take loans against the 401K. I asked my CPA if I should max out the RIRA and do minimal investments to the 401K, but she explained that every dollar that I contribute to the 401K helps reduce my tax liability. Every dollar contributed equals 40-50% saved from Uncle Sam, depending on your tax bracket. If I can use a combination of employer 401k, Solo 401k, and loans from both plans, then I can leverage it through real estate and get depreciation. Eventually I want to learn about whole life policies to shelter more money for investing and leverage even more.
whole life insurance is a ripoff, it won't help you shelter your income from taxes and is only promoted by insurance companies and agents who sell it, just google it, do your own research.
Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
8y
I agree with @Nicole A., @Mark Smith. I've contemplated this question many times (believe I've made a few posts about it). And I actually paused my contributions in 2017 but restarted this year. It really came down to this:
My employer does a 25% match - i think of it as house money because I'm certainly not seeing that kind of immediate returns versus our buy and hold properties.
I like the diversification. I also like to diversify in all asset classes of RE.
Something else I did when I restarted contributions this year is changed my portfolio mix to something less risky. I'm thinking safety net here, long term play.
The ability to borrow against my 401k if I find a property that fits my criteria (haven't done this yet, so take it for what it's worth).
If $168/month is what it'll take to help grow a portfolio to support yourself and your family, then you'll find the money elsewhere. My challenge to you is start talking to everyone you know on the subject of real estate investing. You should expect a majority of the conversationalist to not be interested in the subject, which is fine as your narrowing your target focus for when you find a deal. Let me know if I can help!
Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes
8y
Keep in mind that while you can loan yourself 50% of your 401k, if you leave your job you have to pay the loan back. I recently changed jobs (from being a contractor for the federal government to becoming an employee directly for the federal government) and if I took out a loan against my previous employers 401k I would not have been able to switch jobs (which included a pay raise and more job security) unless I paid it back. So you better have a lot of faith that you won't get fired or have a desire to leave your current job if you take out a loan against your 401k.
That said, I have been maxing out my 401k every year. In 2017 I tried the strategy of making massive contributions to my 401k in the beginning of the year, so I contributed enough in the beginning of the year so that I would contribute only 3% (the amount of my employer match) for the rest of the year. I researched it and more years than not, the returns were better if the bulk of your 401k was invested in the stock market at the beginning of the year and had the whole year to ride the stock market up vs. dollar cost averaging into the stock market with equal amounts of every pay check. In retrospect that was a good move for 2017, but it will not always be the case (when the stock market has a down year).
I like to use the 401k to bring my taxable income down but with the new tax brackets and the new difference in tax rates I am not sure how 2018 will play out for me so my plan this year is to only contribute up to my employer match for the beginning of the year until the fall so I have extra cash to potentially buy more property in 2018 and then I can evaluate things in November 2018 and then I can contribute the majority of my paycheck to reach the $18,500 max if I see that I will benefit from bringing my taxable income down with more contributions to my 401k. It's like waiting until April 15th to decide whether contributing to a traditional IRA is worth it or not taxwise.
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
@Ron Gallagher actually, a number of employer 401K plans don't make you pay the loan back when you leave, you just have to keep paying. And if you don't pay it back, it becomes a withdrawal, not a ding against your credit, though it will limit your ability to do it again and you do pay a penalty.
One thing I haven't seen mentioned above is that banks want to see proof of reserves for most investment RE transactions and the 401k/IRA/other retirement plans can provide that. The various banks I've dealt with have always considered them sufficient. Thats actually a powerful real estate tool, and you still have the option of cashing a portion out later.
I've done all of the above with retirement accounts; 401K loans allowed us to buy our first primary home which skyrocketed after 08 , a cash out on a separate plan served as the downpayment on our first investment property, a self-directed IRA loan was proof of reserves for a larger deal and I think I'm missing an example or two.
Taken together the retirement piece of things has been our most powerful tool for real estate liquidity and I'm still in my 40s (barely, but still, not ancient :)
But this only works (alert, incredibly obvious point ahead) if there is money in the account.
There is a great old saying "never excercise the option early" and it is very, very early for you....good luck.
Investor · Columbus, OH · Member since 2015 · 625 posts · 601 votes
8y
Keep the 401k. You have an employer match, why leave free money on the table? if you need an extra 168 a month then get a side hustle or work some OT. Even if you have rental property to rely on in retirement what does it hurt to have another income stream coming in from a 401k?
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
8y
One thing that I remembered while reading this thread again this morning is regarding the employer match. Ask your company how often they actually deposit their match into your 401K account. It kinda gets me steamed to hear about companies that only deposit their match twice or even once a year because then you lose out on more potential compounding/growth of your account. My company is really on the ball in that they deposit every single pay period.
Keep the 401k. You have an employer match, why leave free money on the table? if you need an extra 168 a month then get a side hustle or work some OT. Even if you have rental property to rely on in retirement what does it hurt to have another income stream coming in from a 401k?
Just to add to your point, I fully retired now. But for the last several years, I was semi retired, with a part time gig, collecting my Social Security, collecting rent on my paid off properties, and had my wife put off collecting her SS so she'll get a few hundred more a month when the time comes. We had enough to live on, and pay college tuition for one daughter.
For a number of years, while a we have our 401K from our working days, we didn't touch it. It went up over $100K this year with the stock market on a tear, and somewhat less than $100K the year before. Housing prices shot up, and it the last 2 years, duplexes in our area went up $100K each year.
This year we all went to the dentist, all 4 of us, and we need root canals, crowns, and even though with dental insurance, our co-pay is considerable. This week, we couldn't find an endodontist in our plan with the right equipment, and with a call to our health plan, they found one, and gave us the name, but 10 miles away. We googled him, and he had bad reviews, rated one out of five. We checked ones out in our area, had better reviews, but one guy will charge $1,150 and another $950, both not in the plan, which we'll have to pay out of pocket. On top of which, our older girl will be finishing college, had to go this past summer to have enough credits to graduate this June costing a few thousand more. Then, a tenant fell behind paying the rent.
As the old saying says, when it rains, it pours.
What did we do?. Told my wife we'll draw on our 401K. It's actively managed, and told the advisor we'll need 5K now, maybe 5K in a few months. Decided to skip the endodontist in the plan rated 1 out of 5 and pay from our own pockets. Why not? Decided that 401K's is exactly what this situation calls for.
We had a year like this in 2011, had to put on a new roof, and we all had to upgrade our PC's, ran us about $10K. With good 401K's, we're sitting pretty, and could take care of most things that come along.
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
8y
Mark Smith I would take it out. You might want to take advantage of the match but ultimately what’s the highest and best use for your money. Do you want it to be in stocks for 5-10% or do you want 20% or more in direct investments.
Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
8y
@Nicole A. I once worked for a company that switched how they paid their 401Ks. They went from depositing the money every paycheck to depositing the money once in December only. The explanation was that it would help save jobs. Of course they tried to get as many people fired as possible before December.
That said, every situation is unique. I lost lots of money in the market between 2005 - 2008. But from 2009 until today, the market has been great.