Wholesaler · Utica, MI · Member since 2013 · 133 posts · 36 votes
hi everyone,
Glad to join such an awesome community and grateful for everything I've already learned here on BP.
I am a 401(k) consultant and MBA student with a concentration in finance.
I enjoy traveling, boating, hunting and playing poker.
Because I travel a lot for work and am going to school, I've been looking for turn key rentals that I will have managed. I'd like to do that until I can aquire enough rentals where I can do REI full time and start managing my properties and being more hands on to become more profitable. Just bought my first rental from a friend and fellow investor for $25k turn key that rents for $750 a month.. Looking forward to learning more and contributing. I'm new to the REI game, but feel free to ask me questions about your 401(k), mutual funds etc for now until I have more knowledge to bring to the table on REI
My rental is in Kalamazoo, MI. I'm currently looking for properties in oakland and macomb county MI
I am also a newer investor in the SE Michigan area.
Quick question for you...I have asked several people in all fields of finance and i never get a consistent answer! Should i max my 401k or Roth first? This is based on my company matching up to 6%
As of now i max the 401k and only put a little bit a month into the roth?
If you can keep that rental filled then you have a better investment than I ever even hope to make. Nice start.
Please educate me on using a self directed 401k to invest in real estate. I have about 20k in mine now and add 10k annually. I'd like to get it out of stocks and into property.
@Tim Barry It's not a standard answer, "it depends". Basically it depends on if you expect your tax bracket in retirement to be lower than now. For most people this is a yes since you are working now and hopefully won't be in retirement.
I have always maxed my 401k and the wifes first and then put some in roth iras. We are both working so we expect to be in a lower tax bracket when we retired.
Regardless of you decision you should minimally use all the 6% match.
@Chris Adams Years of browsing and chatting on the twoplustwo forums (check them out if you haven't) brought me a ton of knowledge and made me a lot of money, I know that won't compare to what I learn here. It's suprising how many decision I make in life that I relate back to poker. Every situation seems to have pot odds and +EV that can be analyzed :)
Example of someone who might want to do Traditional contribtions:
Joe - 59 years old further along in his career making more money in a higher tax bracket. Joe wants to go in pretax because he is in a high bracket right now and when he retires next year he knows his taxable income is going to drop off because he's no longer working. So he wants to avoid his 25% tax bracket when putting the money in, because he's much happier paying the 10% tax bracket when he takes it out. So someone that believes they will be in a lower bracket when they take the money out and chances are they'll retire before the politicians make any drastic tax changes.
Example of someone who might want to do Roth contributions:
Billy - 20 years old making minimum wage. Billy doesn't mind the money going in after tax. He's only in the 10% bracket right now and has no idea what bracket he'll be in when he wants to take the money out, but is guessing it will be more than 10%. So someone that believes they will be in a higher bracket when they take the money out OR they realize that the politicians like to change taxes on us over time and we really don't know what taxes will look like in 5, 10, 20, 40 years so I'd rather just get it out of the way now and never have to think about it again.
They are both tax advantaged accounts so either are good things to be putting money into. There are other differences that you'll want to think about too, but that gives you somewhat of a thought process to have on how you want your money taxed (because Uncle Sam is taking his cut at one point or another).
Whenever you get a match you always need to do that to get free money. No matter what your tax situation never pass on free money. You said you're currently maxing your 401(k) and then some into IRA, so you're adding more than $17,500 into your retirement accounts. The max for 2013 is $17,500 in 401(k) and $5,500 in IRA's. So unless you make $290k a year 6% won't max out your 401(k). If you make $75k for example you can do 6% to get the match, which would be $4,500 into 401(k). Max out Roth putting in $5,500, and now you're up to $10k in retirement accounts. Since you already do over $17,500 you have to figure out where to put the remaining $7,500+. Here's where you'll want to go back to the examples above and talk with a tax professional. It's your tax persons job to make sure you never pay more in taxes than you have to. You can also compare fees and expenses between your 401(k) and IRA and weigh out any other pros and cons. IRA's can be done dirt cheap through something like Scott Trade and by putting money into an index fund with very minimal expense ratios. That's not for everyone though, some people prefer 401(k) even though they're more expensive because maybe they have a really helpful rep like me that talks them out of selling off all their stock when the markets at the bottom, or don't have the time or interest in taking care of it themselves or like that it's done right out of payroll because they know realistically they won't be deligent enough to regularly contribute on their own, or whatever...
Just like you diversify between stocks and bonds and different funds, it's not a bad idea to diversify between before and after tax money. That way when you retire you can decide on what pool of money to take out of, the Roth or Traditional. Also Traditional the IRS will make you start taking money out after age 70 where Roth you can leave in their forever or pass on to your heirs or favorite charity.
Well hopefully this answers your questions, unfortunately usually the answer always comes down to it depends, but CPA should be the one that gives the answers for your specific situation because the question between Roth and Traditional comes down to taxes and it's their job to make sure you pay the least amount possible.
Let me know if you have any other questions.
Disclaimer: Always talk to a trusted licensed professional about any tax and investment questions. The above is just the 2 cents of a random guy on a real estate forum and not a guaranteed answer or solution :)
To be honest I have next to no experiance with Self Directed IRA's, but it is something that a client in Texas was recently looking into for unconventional IRA investments such as real estate and oil interest. Once I hear more I'll pass along the info.