So my wife and I are torn on this question. We're both 33 years old and we have been maxing out her 401k at her w-2 job for a couple of years. That's great of course and I'm not complaining. However, if we just contributed the 401k employer match we would basically be able to buy another rental property annually with those savings. Or at least use it for rehab. I am a self employed investor/agent out of Triad NC and I contribute a significant portion to my SEP IRA annually. Again, the problem is I won't have access to those funds for another 25+ years (which is ridiculous but don't get me started). Even though both the 401k and the SEP IRA reduce my taxable income, I would still get an overall better return if I continued buying cash flowing rental properties with it. I think I know what the answer is but I just wanted to ask the BP community to see who else is struggling with this same problem. We are on the fast track to retire before I'm 40 (if we want). So I don't exactly see the benefit of having that money tied up in a government regulated account for the next 19 years after we retire early. Is that not a waste? We will most likely put the minimum match in her 401k for 2021 and I'll consult with my CPA towards the end of the year to see if contributing a small amount to the SEP IRA would greatly reduce my tax hit. As always, I am thrilled to be a part of this BP community and I thank Josh, Brandon, David, and everyone else who has been involved with providing this basically FREE platform and podcast. It's truly incredible what has happened to me and my family since we started listening 4 years ago.
If you have that much in retirement, use that retirement money to invest in rentals.
I had the same problem @Jason Coleman . I don't like when someone else is controlling my hard earned money or penalize you for using it when you need them.
But here was my issue. With those retirement funds, you can't just take them out and buy properties. I think the gov only lets you use something like 10k for your primary home downpayment without paying penalty.
Personally my view was, only contribute what the employer matches (free money). Then take the rest and buy properties. Yes, doing 401k lowers your taxable income, but so does the investment properties depreciation and all the write off for rehab etc. And you have full control over the funds. You can use them as you need them. You stay in control.
Retirements funds are great, if you are not good with money or don't know any better way to invest them on your own. That is my philosophy.
You don't have to take it out to buy properties, you leave it in to buy properties. ;)
I agree with Jiri. I think for a lot of people maxing out their 401k makes since because they are not active investors. But if you are an active investor I believe real estate can offer higher returns and liquidity (which is especially important if you want to retire early).
Take the free money but after that I would buy rentals.
You typically' cannot use tax advantaged money to buy an investment where you could add "sweat equity" like a rental. Plus, why would you want to? The tax benefits are stellar for real estate as is!
You might want to use that IRA money to invest in REITs or an RE fund if not the stock market.
Jason, lots of great responses already. I still have a W2 and I contribute 7% only because my employer will match 50% up to 7%. So I contribute 7% just to get the "free" money. But my choices inside that retirement account are about twenty different options, none of which I would invest in if it was outside a controlled account. Therefore I don't contribute anything above the 7%. A great resource for talking about retirement fund options would be @Josh Plave and I also would recommend speaking to @Tamiel Kenney or @Brent Kawakami about how cost segregation in large multifamily could have great impact on reducing your taxes. Hope that helps! Happy New Year!
Thank you very much to everyone who responded. This has been very helpful. I have switched over my pre-tax accounts to the minimum match. Look's like I will pretty much have another 30k to use annually based on what we contributed for 2020. Let's go!