Max out Roth or save for real estate?

76 Replies

Hi guys, I wanted to get some outside opinions on something I’ve been thinking a lot about over the past year or so. 

I have a goal of reaching financial independence by 30. I am 25 years old, married, have a mortgage on my home and a heloc that I used to invest in an apartment syndication. Currently in the 24% tax bracket.

My father has always told me “max out your roth no matter what!”. I’ve been doing this and I realize the long term potential, however I feel like contributing $12,000/year slowing me down in the short term. I'm currently maxing out my roth and focusing on paying down the heloc with any other money I can come up with. If I stopped maxing out my roth I would pay the heloc off in less than a year and continue saving until I found a good rental property to purchase using my heloc and any additional cash I've saved. My thoughts are that if I repeat this process over the next few years it could expedite my journey to FI.

In short, should I continue maxing out my Roth or should I pause for a few years to pursue more real estate investments?

Thanks in advance.

If you haven't read @Scott Trench 's book Set for Life it may be a good place to start. He has some solid advice. I am not personally putting money into any retirement accounts right now. All extra money is getting pumped into real estate. Once we have built up enough passive income from real estate to feel comfortable without W2 income, then we will re-evaluate the strategy. 

@Cassi Justiz I'm actually reading his book right now and love it so far. I look forward to finishing it. Thanks for the tip!

@Tyler Hogan

Did you know you could buy real estate in your Roth IRA? There are some rules and regulations, but depending on your goals for retirement, this may be an investing strategy you might be interested in learning more about. The exact type of account is a self-directed Roth IRA. This type of account allows for investors to use funds in their Roth IRA to invest in alternative assets such as real estate and private lending.

The general way this works is that the IRA purchases the property in question (if there are insufficient funds, the IRA may obtain a non-recourse loan) all expenses incurred by the property are to be paid by the IRA. All proceeds generated by either rental income or sale go back to the IRA as "profit" or "gains".

Should you slow down your contributions? That depends on your goals and where you want to be in retirement. I personally like to use my Roth as a real estate investment tool.

I'm always leery about any of those accounts- IRAs, roths, 401ks, etc. I realize they are the primary retirement means, but I don't like how they hog my money up and in the ways they tax it and such. I feel like I have more flexibility and growth potential, and fluidity and control, when I do real estate. 

Personal opinion with no good arguable basis, but I just don't like any of those accounts personally. I see my dad too tied up with his--how much he'd have to pay in taxes to pull any of it out, so he's not pulling it out, which seems pointless to me. Literally money he can't use without coughing up a huge chunk of cash to have access to it.

Originally posted by @Tyler Hogan :

Hi guys, I wanted to get some outside opinions on something I’ve been thinking a lot about over the past year or so. 

I have a goal of reaching financial independence by 30. I am 25 years old, married, have a mortgage on my home and a heloc that I used to invest in an apartment syndication. Currently in the 24% tax bracket.

My father has always told me “max out your roth no matter what!”. I’ve been doing this and I realize the long term potential, however I feel like contributing $12,000/year slowing me down in the short term. I'm currently maxing out my roth and focusing on paying down the heloc with any other money I can come up with. If I stopped maxing out my roth I would pay the heloc off in less than a year and continue saving until I found a good rental property to purchase using my heloc and any additional cash I've saved. My thoughts are that if I repeat this process over the next few years it could expedite my journey to FI.

In short, should I continue maxing out my Roth or should I pause for a few years to pursue more real estate investments?

Thanks in advance.

For the overwhelming majority of Americans, it makes sense to max out all tax advantaged retirement accounts. 

That overwhelming majority is doing absolutely nothing entrepreneurial, however, just sitting in a corporate job collecting a W2 salary. It's great advice for them.

Successful entrepreneurs, if they are indeed successful and have "proven" that track record to themselves (actual numbers, not projected), can often do much better putting the money to work themselves. This could be real estate, or it could be making widgets.

Hybrid of those two might be the Self Directed IRA, something I am not an expert in.

@Tyler Hogan

Definitely max out your Roth IRA. The Roth IRA can also be invested in real estate, and is a good way to grow your Roth IRA.

I would listen to your father. It's really hard to pass on the tax-free space that a Roth IRA gives you. Use it or lose it. You can always take out your contributions penalty-free if needed.  

Personally, I do both.  I max out my ROTHs and invest in RE.  However, I make sure my market investments don't include REITs because I'm investing in RE myself.  The one thing I have modified is that I've stopped investing in the market outside of my ROTHS for reason other members have posted in this threa.  

There's on old proverb I try to follow from a wise old king; "Divide your wealth (money) to seven or even eight" - meaning, diversify your investments among multiple arenas.

Originally posted by @Ali Boone :

I'm always leery about any of those accounts- IRAs, roths, 401ks, etc. I realize they are the primary retirement means, but I don't like how they hog my money up and in the ways they tax it and such. I feel like I have more flexibility and growth potential, and fluidity and control, when I do real estate. 

Personal opinion with no good arguable basis, but I just don't like any of those accounts personally. I see my dad too tied up with his--how much he'd have to pay in taxes to pull any of it out, so he's not pulling it out, which seems pointless to me. Literally money he can't use without coughing up a huge chunk of cash to have access to it.

Ali my thoughts lately have been lining up with yours here.  I have a 401K rollover from a previous job and am putting a small portion of my income in the company 401K now (Nice high match), but I wonder at what price?  I think if I need it I'll be worried about taxes and penalties and when it does come time to draw and use it I'll be too scared to because I've been stacking it slowly but surely all those decades and now don't want to drain it!

I am not doing any Roth or increasing my contributions from my pay any more...just letting what I saved grow and putting everything into another STVR, and then another, and then we'll see what's possible.  And as soon as I made that decision I felt better and worried a bit less.   Thanks for your "Confirmation Post"!    NO maxing here OP!

Dabbling doesn't work well with RE.  She's selfish and pretty much requires all or nothing, especially early on.

I would never hold RE inside an IRA. A million rules and you can't depreciate it. Lend or flip maybe, but don't hold. No need to limit a tax advantaged asset because it's inside a tax advantaged acct. Use your Roth to hold dividend paying stocks, MLPs, things that need shelter. Not RE.

Syndications are a risky mutual fund you can't leverage. Might as well buy a REIT, at least til your ownership inside the syndication is real. Don't dabble in syndication. No control. No say.

You're doing great. I'd fund the Roth like you are and dabble in retirement accts and dabble in a Heloc and dabble in my primary.  

Owning rentals requires much more than dabbling and it's ok if you're not there yet.  You are still doing better than 90+% of people your age.

@Doug Pintarch I didn’t mention that I’m currently making 401k contributions through work up to the company match which is 3% dollar for dollar. I can’t turn free money away! Other than that, I’m not doing any tax deductible investing.

My father was an upper middle class wage earner and retired as an engineer a few years ago around 60 years old. People expect expenses to go down after retirement, so they think "lower tax rate" when they start pulling from these 401k and IRA's. His expenses actually went up, so he's had to find ways to get money more creatively than just pulling funds out and taking the tax hit. For example, getting a mortgage on his house paying 3.5% interest instead of paying a high tax rate to pull from his IRA. I see why he wants me to max out the Roth, which wasn't available when he was my age. I also realize that he was a W2 employee his entire life, which is not the route I want to take so my path will be a little different.

My son just landing his first job in Engineering he is talking about going into a Roth 401-k, here is some info I found for him :

Roth 401(k) vs. Traditional 401(k)

The main difference between a Roth 401(k) and a traditional 401(k) relates to the taxation of funding and distributions.

When a traditional 401(k) is funded, the account holder the contribution is deducted from the employee's pre-tax income. Alternatively, contributions made to a Roth 401(k) are made after taxes are already taken out.

When a distribution is made from a traditional 401(k), the account holder is subject to taxation on the contributions and its earnings. Alternatively, the account holder is not subject to any taxation from Roth 401(k) distributions so long as they are qualified.

So if you are going to make more money in the future Roth is the way to go .You will be taxed at lower current tax rate vs taxed a higher tax rate in the future when making more money .

Originally posted by @Tyler Hogan :

@Doug Pintarch I didn’t mention that I’m currently making 401k contributions through work up to the company match which is 3% dollar for dollar. I can’t turn free money away! Other than that, I’m not doing any tax deductible investing.

My father was an upper middle class wage earner and retired as an engineer a few years ago around 60 years old. People expect expenses to go down after retirement, so they think "lower tax rate" when they start pulling from these 401k and IRA's. His expenses actually went up, so he's had to find ways to get money more creatively than just pulling funds out and taking the tax hit. For example, getting a mortgage on his house paying 3.5% interest instead of paying a high tax rate to pull from his IRA. I see why he wants me to max out the Roth, which wasn't available when he was my age. I also realize that he was a W2 employee his entire life, which is not the route I want to take so my path will be a little different.

That all makes sense Tyler, both for you and your father.  The age of the "Lifetime job" and pension-till-you-die are loooong gone I'm afraid.

@Tyler Hogan . I’d put it in the Roth. On a side note you borrowed money (heloc) to invest in a syndication. Was it a syndication for non accredited investors? If you’re accredited you probably can’t contribute to a Roth anyways so you’re probably not accredited.

@Caleb Heimsoth that is correct. We are not accredited. I am comfortable with the investment though, as I’ve known the syndicator for years. Thanks for the tip.

@Tyler Hogan you should max out your Roth every single year. It is not one or the other, but Roth first, then real estate investments.

Here is why:

1. The biggest expense in your life is taxes (24% currently in your case), so you should always use strategies to minimize them. Roth money goes in after taxes, but grows and withdrawn tax free. I predict real estate investors will be hit with even more taxes in the future, so this gives you a way to shield a portion of your future income. 

2. Investment accounts have protections from bankruptcy, divorce and even litigation. So even if everything goes to he11 in your life, there will be some money left in your old age. You may say none of these things will happen to you, but I have yet to meet anyone who expects these things in their future.

3. It is diversification. Invest in index funds that mirror the whole market or fortune 500. Set it and forget. You will enjoy a steady 8% or higher growth without doing anything.

4. Roth have no minimum withdrawal requirements. Let's say life goes great and you retire early and never need to dip into your ROTH money. It grows to millions of tax free money just waiting until you need it. Maybe it is needed for assisted living in your 90s or maybe you never touch it and pass it on to your children.

@Ali Boone there is no tax on Roth withdrawal. It sounds like your father put his money in a standard IRA or 401K. The money goes into those accounts pre-tax and is taxed when you withdraw. Your father will be required to take withdrawals when he reaches age 70.5 and there is a 50% penalty if he doesn't do this. By comparison a ROTH has no minimum withdrawal requirement and is withdrawn tax free.

@Cassi Justiz Scott Trench later followed up on a BP podcast that he now recommends the 401k, contrary to what his book states. 

I know that for me the 401k has been great. Between the tax benefits and employer match it doubles my investment overnight risk free. I have access to the money in a few ways (401k loans & other methods well-suited for early retirees). 

I could see the situation getting more complicated if you're not able to do meaningful savings while maxing out your retirement accounts, but I still doubt that it is best to entirely ignore your tax advantaged accounts.

That's a good point @Chris Parker

When I had access to an employer sponsored 401k I did enough to get the match (because free money!), but everything extra went towards down payments for rental properties. 

To me, a $19,000 down payment on a cash-flowing rental property will do a lot more to expedite my path to FI than a $19,000 contribution to a 401k. Everyone has different paths though. If someone can max out tax advantaged accounts while still saving enough to rapidly grow a real estate portfolio, then by all means that would be the way to go. I had to choose one or the other and decided to go all in on real estate for now. 

@Tyler Hogan

Also, you can pull principal out of your Roth IRA at any time, instead of using the IRA itself to buy RE, and if you have a 401k you can take a loan and you have something like 5 years to pay it back otherwise it could become taxable.

@Tyler Hogan

I would stash away as much in your Roth right now. That's what I did until I found a good deal on a property I really wanted. I took out 62k worth of principle from my Roth to snag a good all cash deal. I wasn't taxed a penny because it was just the principle I had put in over the years for my wife and my Roth's. I have no regrets at all for doing this. I took out a HELOC for the remainder of the cash I needed for this deal. You've got a 401k and you're young. I would keep stashing away with the intent of using that money in bulk for an investment property. Good luck.

Originally posted by @Doug Pintarch :
Originally posted by @Ali Boone:

I'm always leery about any of those accounts- IRAs, roths, 401ks, etc. I realize they are the primary retirement means, but I don't like how they hog my money up and in the ways they tax it and such. I feel like I have more flexibility and growth potential, and fluidity and control, when I do real estate. 

Personal opinion with no good arguable basis, but I just don't like any of those accounts personally. I see my dad too tied up with his--how much he'd have to pay in taxes to pull any of it out, so he's not pulling it out, which seems pointless to me. Literally money he can't use without coughing up a huge chunk of cash to have access to it.

Ali my thoughts lately have been lining up with yours here.  I have a 401K rollover from a previous job and am putting a small portion of my income in the company 401K now (Nice high match), but I wonder at what price?  I think if I need it I'll be worried about taxes and penalties and when it does come time to draw and use it I'll be too scared to because I've been stacking it slowly but surely all those decades and now don't want to drain it!

I am not doing any Roth or increasing my contributions from my pay any more...just letting what I saved grow and putting everything into another STVR, and then another, and then we'll see what's possible.  And as soon as I made that decision I felt better and worried a bit less.   Thanks for your "Confirmation Post"!    NO maxing here OP!

Haha. You're welcome! Yeah, you point out the dilemma- what about funds already in one and especially with the matching option. I really don't know enough about the logistics of those accounts more than just having to pay taxes (on one end or another whether roth or not) and fees. I always feel like- dude, it's my money...gimme! And yet they are holding it. I don't know, just rubs me the wrong way.

Confirmation = confirmed! :)

@John Morgan so when you pulled the past contributions out you can’t ever put that money back for the previous years correct? If so, what would be the purpose of making the contributions in the first place? I’m not very educated on the capabilities with a Roth other than the basic stuff, nothing about RE. Maybe I’m missing something

If you are in the 24% tax bracket you are making $200k a year; 12 k in your Roth each year is a small percentage of your income so I would not change that, you should have plenty of disposable income to save up a down payment without stopping the Roth. However a year is not that long so if you wanted to pay your heloc off faster it won’t be th end of the world. Just make a decision and move forward.

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