Max out Roth or save for real estate?

76 Replies

Grant Cardone would tell you to put your money in real assets such as real estate. 

@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.

@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 :-)

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.

@Caleb Heimsoth

@Alan Grobmeier

@John Morgan

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!

Originally posted by @Christine Caturano :

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! :)

@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!

@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? 

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.

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.) 

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

@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.

@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.

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. 

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 (199720062013) about the retirement crisis facing America. With 10,000 Boomers retiring every day now, I'm not sure what the societal end game is.

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. 

@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?

@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. 

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.

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

Originally posted by @Christine Caturano :

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.

@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.

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 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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