Traditional 401k, Roth IRA, or neither?

9 Replies

Hi everyone,

Just as a quick backdrop: I am a 23 year old working a full time office job and contributing 8% (4% traditional, 4% Roth) to my 401k, and getting 4% matched by my company.

What I am wondering is if I should be contributing to my 401k when I am trying to build up as much capital as I possibly can to be able to buy my first rental property ASAP.  I appreciate the tax advantages of 401k's, but I feel as though it doesn't make sense for my goals.  I want to get into properties as soon as possible (1st property in next 1-2 years), and switch from my office job to rental properties in my mid 30s.  

If all goes as planned based on the power of compounding with rental properties, the 401k and Roth IRA that I'm building up now, wouldn't be of much value to me by the time I'm 65 because my rental properties should be cash flowing enough for me. So all that my 8% of contributions are doing right now are delaying the capital I need to get going with purchasing my first rental properties.

So I was wondering.. what do you all recommend.. should I just stick with a traditional IRA, should I do a Roth IRA because I can withdraw contributions at no penalty to put into rental properties at some point down the road, or should I not contribute to any kind of IRA?

Thank you everyone in advance for the insight!

@Spencer R.

I would at least continue contributing the 4% to the Roth 401k so that you continue to get the 4% match, as you are correct regarding not being able to access those funds until you start taking distributions from the plan once you meet a triggering event.

@George Blower - I should have clarified.. my company matches 50 cents on the dollar up to my 8% (so they do 4% total).  I know everyone recommends contributing at least as much to get the max match from your company, but I was contemplating if I should still contribute that much given my goals and what I am hoping my situation will be by the time I am able to access those funds.

Hi @Spencer R. ,

You are correct that traditional retirement accounts are not the right fit for everyone.  However, in general I like them because they diversify your assets.  I also like that they are a forced savings account.

My question is how much does contributing to a 401(k) plan really slow you down on your real estate investing goals?  If no longer contributing only gets you your first purchase a few months sooner, I don't see the point.

Another thing I would consider is, if your 401(k) plan allows it, taking a loan from your 401(k) plan.  If you are allowed to take a loan from your 401(k) plan, you are effectively having  your company help finance a portion of your purchase through their match.

Assuming you don't need the tax break now (while you're likely earning less in the start of your career), I'd do 8% Roth 401(k) (their 4% match will always be pre-tax). Then, as a secondary source, you might consider the Roth IRA because, as you stated, contributions come out tax and penalty free. The one thing to keep in mind, since you mentioned you may need the funds in 1-2 years, is that if your Roth IRA investments drop in value, the contributions you later back out for rental property could be worth far less than what you actually contributed (if the market crashes, for example).

First of all let me commend you on already making these kind of plans and asking these kind of questions. Good for you. My suggestion is you are already investing and receiving an employee match. Don't stop. That's your bird in the hand. You don't know how your real estate career is going to look in a few years. Best case scenario you blow up in real estate and your retirement account is just a little pocket change. Worst case, the rentals fall apart and and the retirement account is a nice little parachute you'll be glad you have. Invest in your retirement account and forget about it. Learn to live without it. Do your real estate with the assurance that you have multiple retirement strategies. An example would be for me. I have a Roth IRA that I haven't touched for 20+ years. Today I'm already drawing a great pension from the military and I'm looking for my second rental. I no longer need my Roth IRA. But it's grown to a nice little chunk of money so I just started looking at it again and thinking is there a better use of that fund. I found Note investing through a self directed IRA. Now I'm doing rentals, notes, and have a pension... oh and did I mention that I work full-time. Anyway, the direction that maybe the most lucrative of all of them might just come from the notes that I'm able to buy from putting money away every month into an IRA. Bottom line is give yourself as many options as possible and don't go all in until you have a firm foundation so if you fall, you won't fall too far. Good luck in your investing!!!
Originally posted by @Spencer R. :

thank you @Mark S. .  Are you positive that their 4% match will be pre tax regardless, even if I choose to do Roth 301k? I was not aware of this

Yes

Spencer, if you want to invest in real estate,
I would advise for you to do some research on Infinite Banking as a place to store your wealth. Getting the match is great, but I would not put any more into qualified plans if your goal is financial freedom.

I have 4 policies now, but I wish I knew about Infinite Banking when I was your age. I am not an agent that sells these, but Infinite Banking is very powerful.

@Spencer R.

I have to agree with the majority of the responses here. I am a supporter of the retirement accounts, especially the Roth. As @Joshua Hilliard is using his Self-Directed Roth IRA for note investing, you could consider using your SDIRA/Roth for alternative investments once you have built a solid base in the SDIRA/Roth. For example, you could buy a rental property with your IRA and the IRA would be responsible for all credits and debits incurred by the property.

It certainly sounds like you have made a great start! I wish you the best of luck in your investments!