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.

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 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 Roth money goes in after taxes, but grows and withdrawn tax free.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.

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.

@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.

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.

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.

@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.

@Tyler Hogan That is correct. Once you pull out the money you’ve put into it over the years, you can’t put it back. You can still put in the max per year if your income isn’t too high. And I think you might need to have a Roth for at least 5 years to be able to pull money out like this tax free so double check on that. Here’s why I did this. I knew it would take a few years to build up enough money to use it for a big purchase in real estate. So I was patient and would rather have my money work for me and grow tax free while I waited. I bought and sold several stocks and built up a nice nest egg in our Roths. I put in a total of 92k over the years and it grew to 320k. I also wanted it for emergency money in case something happened and I needed money right away without any tax hits. You never know if something like that comes up! So I didn’t have much of a personal savings account for emergencies earning only 1% in a taxable savings account I let my money multiply in our Roths buying stocks instead. I pulled out 62k for my first real estate investment four years ago tax free and it took only two or three days to be wired into my bank account. This helped me get started in real estate. Making a cash purchase for your first property gives you a lot of options. Then it snow balls from there. I’m up to 6 SFRs now generating 3k/month in passive income. Some people may argue and say never touch your retirement investments until you retire. I disagree. As long as you have a 401k or something else other than real estate, you’ll be fine as far as diversification. And our Roth’s still have about 300k in them today (from our original 92k that we put in over the years minus the 62k we pulled out) which is better than nothing. We haven’t been able to contribute to them in five years due to income level being too high. But I’m guessing it’ll be worth 1.5 million tax free when I retire, so it’ll still help in retirement when that happens.

Max out Roth or save for real estate?

Tyler Hogan

OP

Rental Property Investor · Austin, TX · Member since 2016 · 18 posts · 14 votes

7y

@Mindy Jensen, I have been maxing out my own Roth IRA to date and was planning to max out my wife's starting this year. My job is commission based, so there is more income potential there and I recently started bringing in extra income with a side hustle. My wife is self-employed, so we are both working to dramatically increase income and hopefully max out our Roth's AND save for a down payment once the HELOC is paid off.

By the way, I want to thank you and @Scott Trench for introducing the concept of FI to me. I can't get enough of the podcast. I'm sad I have to wait until new ones come out now that I'm caught up. Ya'll gave me hope once I realized I don't have to be "stuck" in a job forever. I am so fired up about pursuing FI and cannot wait to see where this path takes my wife and I. Ya'll are truly inspiring and changing so many lives.

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Kelly Iannone

Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes

7y

@Tyler Hogan you've gotten a lot of great responses and strategies to think of. I cannot offer anything new but share our strategy (starting 6 months ago). Like you we are in the 24% tax bracket with primarily W-2 income. We have a 30% savings rate, half going's into 401k (mix of Roth and Traditional to give options when we are ready to withdrawal) and the other half to find RE buy and holds (we only have 1 so are still pretty green). We use pay raises to increase 401k contributions and "found money" i.e. bonus', reduction in childcare or living cost to increase REI savings. My husband and I are also both vested for pensions so 55 is our worst case retirement date as we'll also have a hefty 401k at that point. We are using REI to accelerate that retirement date to 46/50 years old :-)

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Jordan Thibodeau

Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes

7y

What's the rush @Tyler Hogan ? I would still max out your Roth and pay down your debt. We are in the late stages of the RE cycle and I don't think you should be overextending yourself.

It's one thing if we were in the depths of the recession and RE deals were appearing left and right, but now there's no rush. You need to diversify your tax liability by having pre-tax and post-tax investments, because if you really believe you're going to hit financial freedom by the time you retire you should be in a much higher tax bracket so paying into a Roth now while your taxes are lower not only makes good asset diversification sense it makes great tax sense too.

I wrote about the FOMO rush in real estate in my l onger blog post that could be helpful for you.

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Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

I'll reread all of these in the next few days...too tired to think much and heading out on travel in the morning. Thanks for sending! At first glance I still don't quite see the perk if, after my write-offs on my properties, I never show taxable income in order to have to pay taxes, but will reread when my brain in firing and get back to you guys. Thanks!

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Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

7y

Originally posted by @Christine C.:

For those who are self-employed (and without f/t employees), you may want to look into the Solo 401(k), it's basically setting up an employee retirement plan (for yourself!) It's perfect for investing in real estate for the long-term. The annual contributions are way higher than an IRA or SDIRA (about $59k/year), you can buy real estate, be a lender, take loans against your asset balance, buy into syndicates partner up with other businesses on investments, and a host of other things, as long as it's PASSIVE INCOME (ex, no buy/sell type transactions.) All income and expenses flow into/out of the trust and it's not subject to UBIT. You can start one "fresh" or rollover an old IRA or 401k plan (though not a ROTH) It does not require a "custodian", you administer the Trust yourself. That's the gist, I'm probably leaving a bunch of benefits out.

I did this when I quit my corporate job and needed to roll my 401k into something. It was fantastic! :)

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Mark Welp

Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes

7y

@Mindy Jensen

Just to clarify on your question about Roth. You technically do not need to be employed to contribute to a Roth. If a married couple files a joint return, the non-working spouse can contribute to a Roth IRA as long as the working spouse meets the income limit.

Hope that helps! Thanks!

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Jay Helms

Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes

7y

@Tyler Hogan - sounds like your dad is a solid guy and you have a lot of respect for him. Is it fair to say you know what you want and what you should to do, you’re just struggling to go against dad’s advice?

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Michael Wagner

Specialist · Victor, NY · Member since 2013 · 823 posts · 844 votes

7y

Why not invest in a SELF DIRECTED Roth? This way you contribute and retain the freedom to invest in the best investment vehicle on the planet. Look at the difference between a Checkbook SD Roth and the more common (non self directed) Roth IRA. Both have pros and cons.

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Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

7y

Originally posted by @Mark Welp:

@Mindy Jensen

Just to clarify on your question about Roth. You technically do not need to be employed to contribute to a Roth. If a married couple files a joint return, the non-working spouse can contribute to a Roth IRA as long as the working spouse meets the income limit.

Hope that helps! Thanks!

Thanks Mark! There are always so many of these little weird exceptions... I'm so glad our community is filled with people who know about them. (I'm also super-disappointed I didn't know this earlier, when I was a stay at home mom and didn't contribute.)

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Mark Welp

Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes

7y

@Mindy Jensen Yeah, tax qualified plans can be complicated...even when you start taking withdrawals! I think RE is easier to understand, haha. Thanks!

1 Reply

Tyler Hogan

OP

Rental Property Investor · Austin, TX · Member since 2016 · 18 posts · 14 votes

7y

@Jay Helms yes I have a ton of respect for him. He's the one who educated me on personal finance and retirement growing up. However, I now realize he went through the "find a good job to work for 40 years, invest 15% into retirement" route which is fine for the average American. Now that I've gotten older and am learning new perspectives (like FI) I'm able to bring my own views to the table and he's liking REI. We've formed an LLC together and have purchased a duplex and invested in the apt syndication, which is something he's never done. It's actually pretty awesome to share this experience with him.

I think he’s right, but I will probably end up taking out the principle in my Roth if I end up needing the money to close on a deal and can’t find it anywhere else. Once my tax situation gets more complicated down the road I plan to get with a tax advisor to help me map out the best path for my situation.

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Frankie White

New to Real Estate · Atlanta · Member since 2018 · 17 posts · 4 votes

7y

@Tyler Hogan

I would definitely take on the "good debt" now and use the money from maxing out your Roth IRA as leverage to boost your earning potential and passive stream of income.

You’re obviously an entrepreneurial and business minded individual. Take the risk now, not when you’re 65 and close to retirement age.

In your case. Don't max out the Roth. You're not saving on taxes by contributing to it anyway. Let what you already have in there grow. I think the biggest thing right now is don't take out loan a from your IRA and 401K accounts.

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Account Closed

Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes

7y

Originally posted by @Mindy Jensen:

Originally posted by @Mark Welp:

@Mindy Jensen

Just to clarify on your question about Roth. You technically do not need to be employed to contribute to a Roth. If a married couple files a joint return, the non-working spouse can contribute to a Roth IRA as long as the working spouse meets the income limit.

Hope that helps! Thanks!

Thanks Mark! There are always so many of these little weird exceptions... I'm so glad our community is filled with people who know about them. (I'm also super-disappointed I didn't know this earlier, when I was a stay at home mom and didn't contribute.)

I like to start with a comparison chart to come up to speed. In those cases were my situation is complicated, I see a tax professional. But I don't want to have to pay a tax professional hourly money to teach me the basics I could have learned on my own time for free.

Two items that are conspicuously absent from these lists are HSAs and 1031 Exchanges. I'm a fan of Roth IRAs and HSAs as tax-advantaged vehicles to build wealth. I don't know that much about 1031 Exchanges, but from what little I do know, I've concluded they are not for me. But I know other people prefer the 1031 Exchange to retirement accounts as their tax-advantaged vehicle of choice.

With regards to HSAs, a few states have not brought their tax laws in alignment with Federal law. As of 2015, California was one of those states. TurboTax would incorporate my HSA benefits in my Federal return and then adjust them (take them away) for my California return.

Tax law, of course, can be changed at any time by Congress. Just because something is tax advantaged today doesn't mean it's going to remain tax advantaged in the future. When Social Security was initiated in the 1930s, for example, FDR said it would never be taxed. Then in the 1980s, Alan Greenspan as a consultant decided Social Security benefits should be taxed.

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Account Closed

Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes

7y

Originally posted by @Tyler Hogan:

@Jay Helms yes I have a ton of respect for him. He's the one who educated me on personal finance and retirement growing up. However, I now realize he went through the "find a good job to work for 40 years, invest 15% into retirement" route which is fine for the average American. Now that I've gotten older and am learning new perspectives (like FI) I'm able to bring my own views to the table and he's liking REI. We've formed an LLC together and have purchased a duplex and invested in the apt syndication, which is something he's never done. It's actually pretty awesome to share this experience with him.

I think he’s right, but I will probably end up taking out the principle in my Roth if I end up needing the money to close on a deal and can’t find it anywhere else. Once my tax situation gets more complicated down the road I plan to get with a tax advisor to help me map out the best path for my situation.

I received the same "40 years and the gold watch" advice from my parents when I was starting out. Then in the 1980s, CBS ran the special After All Those Years, which presented situations where people lost their pensions when companies ran into financial difficulty. The result was the portable retirement plan, meaning you can roll a 401K over to an IRA and make it independent of any particular employer.

One caveat about 401K plans is some employers let their employees invest in company stock. Enron employees in the early 2000s learned the need to diversify the hard way when the firm collapsed due to fraud (the top executives were selling their shares in anticipation of the collapse while telling the employees to continue investing in it). Those with 100% of their 401K in Enron stock did not have a happy retirement.

I believe it's a good idea to question everything, especially conventional wisdom because you never know. Employee benefit and retirement plans continue to evolve as the US economy has moved from agriculture to industry to information as its base. The PBS show Frontline has run an hour special every 10 years (1997, 2006, 2013) about the retirement crisis facing America. With 10,000 Boomers retiring every day now, I'm not sure what the societal end game is.

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Calvin OzanickBusiness Member

Property Manager · Janesville, WI · Member since 2017 · 708 posts · 297 votes

7y

I personally would recommend investing in real estate. If you grow your passive income to a certain point, it can be a consistent means of income even after retirement. I would say you can also do a 50-50 split. There is no harm in maxing out your roth while also saving for real estate at the same time.

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Zach CumminsPro Member

Real Estate Agent · Carlsbad, CA · Member since 2017 · 53 posts · 68 votes

7y

@Carl Fischer

Hey Carl, do the same principles apply to Roth's in every state? Are some more regulated than others? My plan was to max our Roth and mutual funds and then transfer principle investment into the next rental property when that time comes. Or is it easier to open a self directed IRA?

Any suggestions?

0 Reply

Carl FischerPro Member

Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes

7y

@Zach Cummins

For the most part the Roth and other Ira rules are the same from state to state as IRAs are federal. Some minor differences but not worth worrying about at this point.

Yes you can max out your Roth and buy mutual funds and then transfer to a SDIRA when you are ready to buy a property. However I would also open a SDIRA now and put enough cash in it so you can sign a contract when you find the property so you can tie it up until the principle transfer is complete. Preferably find a SDIRA company that doesn’t charge you an annual fee to have just cash in it.

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Zach CumminsPro Member

Real Estate Agent · Carlsbad, CA · Member since 2017 · 53 posts · 68 votes

7y

@Carl Fischer

Perfect, thanks for the suggestion I will check into it now!

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Mike Taravella

Rental Property Investor · Knoxville, TN · Member since 2017 · 160 posts · 107 votes

7y

Hello @Tyler Hogan

Congrats on the Mission of FI! I'm on the same journey and it is always nice to see someone join the mission.

I would keep investing in your Roth and invest in your education of real estate investing. Keep learning and growing so that you can be educated enough to pull the trigger and gain more income producing assets.

There are countless ways to make money within real estate so if you need help, feel free to connect at anytime.

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James Ma

Burnaby, BC · Member since 2017 · 283 posts · 268 votes

7y

If you want FI by 30, why are you investing into a ROTH. Those are contradicting investment goals. Your goal is lofty and I believe you would need to start your own business to achieve something that quickly.

If you want to build up a business now and accelerate enough to be able to not work in 5 years, you need all the money you can get to do that instead of depositing most of it into a retirement account

1 Reply

Justin WindhamPro Member

Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes

7y

Originally posted by @Christine C.:

For those who are self-employed (and without f/t employees), you may want to look into the Solo 401(k), it's basically setting up an employee retirement plan (for yourself!) It's perfect for investing in real estate for the long-term. The annual contributions are way higher than an IRA or SDIRA (about $59k/year), you can buy real estate, be a lender, take loans against your asset balance, buy into syndicates partner up with other businesses on investments, and a host of other things, as long as it's PASSIVE INCOME (ex, no buy/sell type transactions.) All income and expenses flow into/out of the trust and it's not subject to UBIT. You can start one "fresh" or rollover an old IRA or 401k plan (though not a ROTH) It does not require a "custodian", you administer the Trust yourself. That's the gist, I'm probably leaving a bunch of benefits out.

That's a great overview, Christine. I will point out that a Roth 401k can be transferred to a Solo 401k. The "Roth" restriction you are thinking of is on Roth IRAs being transferred to other account types.

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Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

7y

@Tyler Hogan I put 90% of my money into real estate. If I can still hit my RE goals I’ll max out the Roth.

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Account Closed

Member since 2018 · 78 posts · 63 votes

7y

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.

I totally agree with you. My dad did the same thing, put every extra dime into retirement accounts and lived very frugally. He passed away before spending any of it. That started my journey into looking into other ways of preparing for the future. I also have a tenant who is on a fixed income and it is a shame to see a hard working person retire with next to nothing.

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Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

7y

I am very against the Roth or any retirement account (other than 401k in some situations).

You will pay taxes now or later and you will likely to pay more taxes in the future... so pay it now.

And 10% penalty is nothing to be in retail type investments. You can recoup that in 12-14 months.

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Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

7y

Originally posted by @Account Closed:

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.

I totally agree with you. My dad did the same thing, put every extra dime into retirement accounts and lived very frugally. He passed away before spending any of it. That started my journey into looking into other ways of preparing for the future. I also have a tenant who is on a fixed income and it is a shame to see a hard working person retire with next to nothing.

I agree.

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Max out Roth or save for real estate?

Max out Roth or save for real estate?

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