401k scam or not? Taking the plunge..

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

I have never been a big fan of 401k and retirement accounts in general that are invested in mutual funds. I have always thought of it as a "life deferral plan", you put money in, that is money that is lost from your life, does not pay you every month, poof gone.

Plus, most people have no idea what they are investing in. I love real estate precisely because of the control it gives me, and the monthly income. My RE investments already cover my basic monthly income.

However, after researching mutual funds for the last 6 months, and getting a lot of feedback, I decided to start contributing again to the TSP/401k. Every single physician colleague I have talked to, basically said I should be doing it as a way to lower taxable income, and diversify into a different class. The argument is, if you are a high income earner, it would be easy to contribute to a 401k/IRA and invest in real estate.

So against my better judgement, I have decided to take about $15K out of my last 3 paychecks of 2017 to fund the TSP. My real estate has returned 20-30% IRR since 2013, yet I am sitting trying to diversify a little into equities.

I wanted to know what you guys think: about 401k in general, my situation, and your own situation. Is it really a scam? If I wanted to retire around 40yo, are my funds in retirement accounts "stuck? I still see it as 'lost money' that I don't get to spend now, but enough clinical colleagues have convinced me to do it.

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Brian EastmanPro Member

Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes

@Andrey Y.

A 401k retirement plan is certainly not a scam. It is a powerful vehicle for building future wealth.

When you contribute to a 401k or TSP style plan, you benefit in 3 ways:

1) in some cases you may receive an employer match. This is free money or a 100% return on investment, depending on how you want to look at that.

2) You receive a tax deduction for the income contributed in the year in which you make the contribution, reducing your tax bill. This is also effectively a return on investment on the money you contribute equal to your combined state & federal tax rate.

3) By contributing to the plan, you also reduce your overall taxable income, which may drop your tax bracket on the money you do pay income tax on.

So, on the front end, lots of positives.

Investment choices in many conventional retirement plans are limited. That is a potential negative. That said, even a moderate return compounded over time can add up significantly.

Earnings to the plan are tax sheltered. So, instead of diluting your return with taxation, you are accelerating the rate at which your money compounds.

Money in a qualified retirement plan will be locked up until you are 59 1/2, at which point you can begin to take distributions. The idea is that by deferring the taxation up front and on the earnings over time, you can balloon a small amount of annual contributions each year into a large sum from which you can support yourself in your retirement years once you have stopped working.

This is, of course an oversimplified version, but should clearly illustrate the benefits of tax-deferred retirement savings.

You can add to the above the ability to make contributions on a Roth basis and create tax-free income, as well as the ability once you change jobs to move an employer retirement 401k or TSP to a self-directed plan where you can invest those tax-sheltered dollars in things like real estate.

If you are a physician, I would assume you create reasonably significant income, even if you work for the government. I strongly suggest that you have a sit down with an independent financial advisor and/or tax strategist. I'm talking about a financial consultant, not a stock salesperson. You can chart a path that includes a mix of conventional retirement plan and outside investments such as real estate, and create multiple sources of income with different tax exposures.

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Frank Chin
Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
9y
Having a 401K is a good thing, particularly is the companies you work for also contribute. I had employers contribute anywhere from 50% match to 100% match.
I did extremely well with real estate, all my properties went up 4 to 6 or more times in value. On the other hand, I know of investors who over leverage, got caught in real estate down turns, and lost their shirts.
Real estate is cyclical. I had one property I owned that I sold at four times what I paid for it. The exact same triplex next store, an investor bought it to flip during a downturn, sold it at a loss to a second investor who also sold it at a loss. Each held the property for 3 or more years.They each loss about $100K or more because they were overleveraged going into it.
I'm retired now, owned my real estate free and clear, and thus cash flows well and so far have no need for my 401K's. But having the 401K is a nice safety cushion to have, and I have them managed, returns 6% to 8%, not what I made in real estate, but also not a scam.
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Andrey Y.
A 401k retirement plan is certainly not a scam. It is a powerful vehicle for building future wealth.
When you contribute to a 401k or TSP style plan, you benefit in 3 ways:
1) in some cases you may receive an employer match. This is free money or a 100% return on investment, depending on how you want to look at that.
2) You receive a tax deduction for the income contributed in the year in which you make the contribution, reducing your tax bill. This is also effectively a return on investment on the money you contribute equal to your combined state & federal tax rate.
3) By contributing to the plan, you also reduce your overall taxable income, which may drop your tax bracket on the money you do pay income tax on.
So, on the front end, lots of positives.
Investment choices in many conventional retirement plans are limited. That is a potential negative. That said, even a moderate return compounded over time can add up significantly.
Earnings to the plan are tax sheltered. So, instead of diluting your return with taxation, you are accelerating the rate at which your money compounds.
Money in a qualified retirement plan will be locked up until you are 59 1/2, at which point you can begin to take distributions. The idea is that by deferring the taxation up front and on the earnings over time, you can balloon a small amount of annual contributions each year into a large sum from which you can support yourself in your retirement years once you have stopped working.
This is, of course an oversimplified version, but should clearly illustrate the benefits of tax-deferred retirement savings.
You can add to the above the ability to make contributions on a Roth basis and create tax-free income, as well as the ability once you change jobs to move an employer retirement 401k or TSP to a self-directed plan where you can invest those tax-sheltered dollars in things like real estate.
If you are a physician, I would assume you create reasonably significant income, even if you work for the government. I strongly suggest that you have a sit down with an independent financial advisor and/or tax strategist. I'm talking about a financial consultant, not a stock salesperson. You can chart a path that includes a mix of conventional retirement plan and outside investments such as real estate, and create multiple sources of income with different tax exposures.
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Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Brian Eastman:

@Andrey Y.
A 401k retirement plan is certainly not a scam. It is a powerful vehicle for building future wealth.
When you contribute to a 401k or TSP style plan, you benefit in 3 ways:
1) in some cases you may receive an employer match. This is free money or a 100% return on investment, depending on how you want to look at that.
2) You receive a tax deduction for the income contributed in the year in which you make the contribution, reducing your tax bill. This is also effectively a return on investment on the money you contribute equal to your combined state & federal tax rate.
3) By contributing to the plan, you also reduce your overall taxable income, which may drop your tax bracket on the money you do pay income tax on.
So, on the front end, lots of positives.
Investment choices in many conventional retirement plans are limited. That is a potential negative. That said, even a moderate return compounded over time can add up significantly.
Earnings to the plan are tax sheltered. So, instead of diluting your return with taxation, you are accelerating the rate at which your money compounds.
Money in a qualified retirement plan will be locked up until you are 59 1/2, at which point you can begin to take distributions. The idea is that by deferring the taxation up front and on the earnings over time, you can balloon a small amount of annual contributions each year into a large sum from which you can support yourself in your retirement years once you have stopped working.
This is, of course an oversimplified version, but should clearly illustrate the benefits of tax-deferred retirement savings.
You can add to the above the ability to make contributions on a Roth basis and create tax-free income, as well as the ability once you change jobs to move an employer retirement 401k or TSP to a self-directed plan where you can invest those tax-sheltered dollars in things like real estate.
If you are a physician, I would assume you create reasonably significant income, even if you work for the government. I strongly suggest that you have a sit down with an independent financial advisor and/or tax strategist. I'm talking about a financial consultant, not a stock salesperson. You can chart a path that includes a mix of conventional retirement plan and outside investments such as real estate, and create multiple sources of income with different tax exposures.
Thank you very much for feedback. I am dreading going down the path of what I always considered something that benefits the plan administrators, and less so the investor. I think i contributed a littlr bit to the TSP in 2014 and 2015 then stopped. Also, reading about how the average American having something like $90K in their 401k at retirement was always painting a pretty grim picture of that investment vehicle.
Do you have any recommendation for a good financial advisor that may help someone in my situation?
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Andrey Y.
I do not have a specific recommendation for you, unfortunately. Network in your local community, starting with folks you know are doing well financially.
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Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Frank Chin:

Having a 401K is a good thing, particularly is the companies you work for also contribute. I had employers contribute anywhere from 50% match to 100% match.
I did extremely well with real estate, all my properties went up 4 to 6 or more times in value. On the other hand, I know of investors who over leverage, got caught in real estate down turns, and lost their shirts.
Real estate is cyclical. I had one property I owned that I sold at four times what I paid for it. The exact same triplex next store, an investor bought it to flip during a downturn, sold it at a loss to a second investor who also sold it at a loss. Each held the property for 3 or more years.They each loss about $100K or more because they were overleveraged going into it.
I'm retired now, owned my real estate free and clear, and thus cash flows well and so far have no need for my 401K's. But having the 401K is a nice safety cushion to have, and I have them managed, returns 6% to 8%, not what I made in real estate, but also not a scam.
So, you had/have no need for your 401ks. I kind of already feel that way and I'm in my early 30s. I guess when real estate has worked so well that would do it.
It seems like you could have used that money earmarked for your retirement mutual funds to instead invest in even more real estate, resulting in even more profit?
Is there a good resource to look at if say I wanted to access my 401k IRA before standard retirement age, say around age 40-45? Some blogs or website that explain it.
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
9y
Definitely not a scam, however, I am a big fan of the self directed versions of a 401k where I am the administer and in control of the investments (which are all in real estate in some sort or fashion.).
Podcast Guest on Show #130
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Paul G.
Gilbert, AZ · Member since 2017 · 119 posts · 101 votes
9y
@Andrey Y. So, I had something typed up and was going to comment on it earlier, but then I got distracted. :)
401Ks really is a good vehicle for saving when you're getting a match. If you're not getting a match, it's becomes... Average. You're going to be shocked, but I told my wife to stop investing in her 401K (because there is no match, and her options are severely limited, can't even invest in good index funds etc). I'd rather have her money now for RE investing. I've done a couple calculations though and realized that as long as I keep investing the way I am until about 50, I will have enough saved to keep my current lifestyle indefinitely. So, everything that I do for REI is to try and get there quicker so maybe it's 45 when I can stop etc. But I still have that safety net that I know for whatever reason, I have a fall-back plan.
A huge downside to a 401K that people talk about is you're stuck until 59 1/2. With a little bit of fancy accounting work, there is an IRS rule 72(t) that states that you can take substantially equal periodic payments (SEPP) before age 59 1/2 without penalty. I haven't done a lot of research into this, but it seems there is a way out after all once you convert to an IRA. (Please consult a Tax Advisor on this though)
Depending on your 401K plan, you can have your cake and eat it too though... Most 401K plans allow you to take loans from your 401K. Mine offers a term of like 3% interest (which gets paid BACK to your 401K as a contribution) for 5 years up to 50K. The only fee is I think like $50 to setup the account. This way, you're investing in a 401K, getting the tax benefit by decreasing your taxable income, but still able to draw up to 50K from the plan to purchase anything you want. Basically you get to be your own bank for 50K of short-term money. Then depending on your method: Flip, BRRR, Buy and Hold, you could pay that back with either a refinance, sale proceeds, or cash flow. I know you're more REI focused than stock, so this is a way to potentially benefits in both areas.
As for the ROTH route as someone mentioned above, it can get tricky. Not knowing exactly what you make, I believe you are phased out of that investment vehicle, so unless you want to go through the hassle of a backdoor roth contribution, that's out.
With the most recent push for tax reform, there may be the possibility of taxes being lower now than in the future, which is what you were worried about in our first back and forth. I'm not entirely sold yet on this (or even if they will be able to get anything done on this front at all), but that has to at least be said.
I know you've done very well in real estate, so it's a hard sell, but a 401K for people like you is a way to hedge your bets and have a plan for if the RE market is in the down cycle when you want/need money way down the road. Your foundation is REI with stock being a hedge. I have Stock with REI being my hedge :)
3 Reply
Phil Mcnally
Real Estate Investor · Brisbane, CA · Member since 2014 · 76 posts · 48 votes
9y
At the very least your 401k money is making an instant return equal to your highest tax bracket because the taxes were never removed. Maybe you are in the 33% bracket? You could either have $67 after tax for RE investing or $100 pre tax for stock investing etc.
Personally I like the idea of saving taxes and diversifying (into stocks, bonds, REITs) with pre tax, retirement accounts like this while using all the left over money for saving taxes and diversifying into real estate on the post tax side.
Take advantage of everything on offer to you. If you ever get sued into bankruptcy they cant take your retirement money.
phil
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Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
9y
15k out of your last three checks. That is a bad idea. Like you, I don't believe in using the TSP as a method to build wealth. However if you insist on doing it, you should do it right. The first 5% that you contribute to the TSP is matched by the government. If you contribute $5000 on three checks you lose out on the match for the other pay periods. Instead you should spread that amount out.
Podcast Guest on Show #21
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Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Anthony Gayden:

15k out of your last three checks. That is a bad idea.
Like you, I don't believe in using the TSP as a method to build wealth. However if you insist on doing it, you should do it right.
The first 5% that you contribute to the TSP is matched by the government. If you contribute $5000 on three checks you lose out on the match for the other pay periods. Instead you should spread that amount out.
Why is that a "bad idea"? Employer-matching doesn't kick in until 1/1/2018 for active duty anyway. So I just put 50:50 to traditional:Roth TSP to get close to the limit since I haven't contributed in 2017 yet.
1 Reply
Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Paul G.:

@Andrey Y. So, I had something typed up and was going to comment on it earlier, but then I got distracted. :)
401Ks really is a good vehicle for saving when you're getting a match. If you're not getting a match, it's becomes... Average. You're going to be shocked, but I told my wife to stop investing in her 401K (because there is no match, and her options are severely limited, can't even invest in good index funds etc). I'd rather have her money now for RE investing. I've done a couple calculations though and realized that as long as I keep investing the way I am until about 50, I will have enough saved to keep my current lifestyle indefinitely. So, everything that I do for REI is to try and get there quicker so maybe it's 45 when I can stop etc. But I still have that safety net that I know for whatever reason, I have a fall-back plan.
A huge downside to a 401K that people talk about is you're stuck until 59 1/2. With a little bit of fancy accounting work, there is an IRS rule 72(t) that states that you can take substantially equal periodic payments (SEPP) before age 59 1/2 without penalty. I haven't done a lot of research into this, but it seems there is a way out after all once you convert to an IRA. (Please consult a Tax Advisor on this though)
Depending on your 401K plan, you can have your cake and eat it too though... Most 401K plans allow you to take loans from your 401K. Mine offers a term of like 3% interest (which gets paid BACK to your 401K as a contribution) for 5 years up to 50K. The only fee is I think like $50 to setup the account. This way, you're investing in a 401K, getting the tax benefit by decreasing your taxable income, but still able to draw up to 50K from the plan to purchase anything you want. Basically you get to be your own bank for 50K of short-term money. Then depending on your method: Flip, BRRR, Buy and Hold, you could pay that back with either a refinance, sale proceeds, or cash flow. I know you're more REI focused than stock, so this is a way to potentially benefits in both areas.
As for the ROTH route as someone mentioned above, it can get tricky. Not knowing exactly what you make, I believe you are phased out of that investment vehicle, so unless you want to go through the hassle of a backdoor roth contribution, that's out.
With the most recent push for tax reform, there may be the possibility of taxes being lower now than in the future, which is what you were worried about in our first back and forth. I'm not entirely sold yet on this (or even if they will be able to get anything done on this front at all), but that has to at least be said.
I know you've done very well in real estate, so it's a hard sell, but a 401K for people like you is a way to hedge your bets and have a plan for if the RE market is in the down cycle when you want/need money way down the road. Your foundation is REI with stock being a hedge. I have Stock with REI being my hedge :)
That was very helpful. Thank you.
Income now is $1X.X K post-tax per month, so $5K per month into 401k shouldn't be too bad for a few months. Will probably limit it to $1-1.5K per month for 2018.
I agree with you. I can get better returns in real estate investing. Lately, I have had the urge to diversify into something that doesn't take any of my time. Some of the self-managed stuff, although lucrative, has been rather annoying. Like when i went on a camping/fishing trip, I was texting bad and forth with a new tenant coaching her on how to use electronic payment software.
I decided to go 50/50 traditional/Roth, mostly because I genuinely have NO IDEA if I will take a high paying civilian job in the max tax bracket, live off and pursue real estate full time, or something in between - after leaving the service in a few years. Any thoughts on this??
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Charles Kennedy
Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
9y
You can't beat 100% return. Period. My employer matches 6% of my salary so I put in 6%. I don't care that it's "locked away" (from listening to podcasts it seems I can use a self-directed IRA to utilize this without tax penalties down the road), there is no way I'll ever be able to consistently make a 100% return on my money in real estate. On top of that I'm a believer the equity market is very safe, as long as I'm taking a long term approach. With penalties discouraging me from pulling money out earlier, I'm locked in long term. I'm in a different spot than you with my career just starting so I'm utilizing a roth-401k, but it makes more sense for you to utilize a traditional 401k due to your high income.
Now, if you don't have a 401k match from your employer, I still think diversifying is worth it, not to mention the tax benefits.
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Terrell Brown
Philadelphia, PA · Member since 2014 · 25 posts · 7 votes
9y
@Andrey Y. Definitely not a scam, but if you know what your doing real estate will always outperform a 401k. I've worked for the Government for 12 years and have a pension coming and my real estate portfolio outperforms that already. I'm still young so retirement is still 30 years away. Just think what the value would be on a piece a property you buy today, when your finally ready to retire. buying one or two cash at 40-50k a piece, in 10-20-30 values will at least triple and rental income over that amount of time should buy you a bunch more cash!!!
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Billy Smith
Shawnee Mission, KS · Member since 2016 · 719 posts · 313 votes
9y
My wife maxes her 401-k out. I picked the funds i.e. index funds covering all the bases for our risk level.
401-k is not scam, now if you do not read up on the topic and buy into heavy fee funds. They can cut returns over the long haul by a sizable amount the longer the more you lose i.e. managed funds.
I buy single family rental homes for our other half of our retirement.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
9y
@Andrey Y.
I view a retirement account as another tool in my tool box fro saving for retirement, but I would not put all my eggs in one basket.
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Account Closed
Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
9y
I don't believe in them. I have 500k in my 401k that I cannot touch until I leave my job. I'm 46 so I need to wait until I have one foot in the grave before I can spend it. Furthermore there's quite a bit of fees associated with them some of the hidden. Be careful who you take advice from. The majority of people will work until retirement at age 65 (55 if they are lucky). It sounds like your on a track to make money fast. I don't know if a 401k fits in that plan.
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Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
I tallied up the results, based on my judgment from reading all the replies.
For: 7
Neutral: 3
Against: 1
This makes me feel a lot better. On this real estate-focused forum, 7/11 recommended it. On a forum such as bogleheads, it would obviously be 100%, which is why I asked here. I am definitely very pro-RE.
An $18k contribution should hopefully be 20% or less of my annual investible capital. They (Warren Buffet and John Bogle) are predicting only very modest real returns over the next 10-15 years, on the order of 3-5%. Which is a shame. We'll see what happens :)
1 Reply
Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
9y
Andrey Y. Sorry, I was assuming you were a civilian federal employee and did not realize that you are military.
Podcast Guest on Show #21
1 Reply
Frank Chin
Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
9y
Originally posted by @Andrey Y.:

Originally posted by @Frank Chin:
Having a 401K is a good thing, particularly is the companies you work for also contribute. I had employers contribute anywhere from 50% match to 100% match.
I did extremely well with real estate, all my properties went up 4 to 6 or more times in value. On the other hand, I know of investors who over leverage, got caught in real estate down turns, and lost their shirts.
Real estate is cyclical. I had one property I owned that I sold at four times what I paid for it. The exact same triplex next store, an investor bought it to flip during a downturn, sold it at a loss to a second investor who also sold it at a loss. Each held the property for 3 or more years.They each loss about $100K or more because they were overleveraged going into it.
I'm retired now, owned my real estate free and clear, and thus cash flows well and so far have no need for my 401K's. But having the 401K is a nice safety cushion to have, and I have them managed, returns 6% to 8%, not what I made in real estate, but also not a scam.
So, you had/have no need for your 401ks. I kind of already feel that way and I'm in my early 30s. I guess when real estate has worked so well that would do it.
It seems like you could have used that money earmarked for your retirement mutual funds to instead invest in even more real estate, resulting in even more profit?
Is there a good resource to look at if say I wanted to access my 401k IRA before standard retirement age, say around age 40-45? Some blogs or website that explain it.
I was in my early 30's when I got started. At that time doing a 401K at work is an no-brainer, as it was forced savings which many people has no discipline to do.
One thing not mentioned in this discussion is 401K's are protected from creditors. And IRA's depending on the state, also has advantages in bankruptcies. So you have RE investors getting LLC's all over the place that overlooks this aspect. I owned businesses, had LLC's, S Corps and C Corps but have yet to use LLC's for my rentals.
Talking about in my early 30's, I had no idea how 401K's, REI will turn out. One of the two could have been a bust, but fortunately did OK in both. So having both is diversification.
I tried self managing, but when my portfolio went over $100K, years ago, I had it professionally managed, Currently I have wealth accounts at two different banks and managing it is part of the deal. I had been an IT professional and programmer, and doing REI and investing was a little much to handle, in fact a distraction.
As to having W2 incomes, here in NYC, you need two good incomes. But real estate allowed my wife to ditch employment, be a stay at home mom, went back to school, since we had income to do it.
Currently, my older girl is graduating college, and my younger one is starting. We have yet to get a student loan. Based on our current financial situation, the 401K's will probably help pay for some graduate studies without going into debt. We have 529's which was financed by grandma. That's another major expense that 401K's and TSP may have to cover.
1 Reply
Bill F.
Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
9y
@Andrey Y.
Weighing in late to the party, but I'll throw my hat in the ring: It depends.
Bottom Line up Front: For the median person making $54k a year there is a lot to be said for forgoing the 401k and investing solely in RE. Once you start making more money retirement accounts start becoming, like @George Blower says, a powerful tool in the toolbox. People loves to espouse the power of the 1031 in RE, but retirement accounts do the same thing.
A lot of people gave a lot of great advice that was informed by their own life circumstances and goals and not necessarily yours. I didn't read about anyone who was an active duty doctor thinking about transitioning out.
Ben Leybovich talks about burn rate here and it made a lot of sense to me. You probably need to look at your burn rate and see what % of it is gong to taxes and how much you can defer using TSP. Taxes are most people largest expense and they don't even know it.
On the flip side of that coin, @Scott Trench has a great idea about useful net worth. Retirement accounts certainly do reduce your useful net worth until you reach 59 1/2 and in turn effect your ability to invest in RE.
Only you can balance those two ideas out to meet your goals. I too want to retire between 40-45 and I've realized that I'll need two 'retirement incomes' One, which is not in a 'retirement account' per se, to provide for my family from 40-59 1/2 and the other, more traditional, that can carry us until our end of days.
One quick word on TSP: NEVER get rid of it. There does not exist a retirement account which have lower fees to invest passively. My buddy who just got out told me you can transfer funds into your account once you leave active duty, which is great. You get your employer match and then move it to TSP and not pay 2% in useless charges.
3 Reply
Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Will Barnard:

Definitely not a scam, however, I am a big fan of the self directed versions of a 401k where I am the administer and in control of the investments (which are all in real estate in some sort or fashion.).
Can you see a scenario where a traditional and Roth 401k can be rolled into their respective self directed IRAs, which can then purchase rentals and apartments from within them?
1 Reply
Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Bill F.:

@Andrey Y.
Weighing in late to the party, but I'll throw my hat in the ring: It depends.
Bottom Line up Front: For the median person making $54k a year there is a lot to be said for forgoing the 401k and investing solely in RE. Once you start making more money retirement accounts start becoming, like @George Blower says, a powerful tool in the toolbox. People loves to espouse the power of the 1031 in RE, but retirement accounts do the same thing.
A lot of people gave a lot of great advice that was informed by their own life circumstances and goals and not necessarily yours. I didn't read about anyone who was an active duty doctor thinking about transitioning out.
Ben Leybovich talks about burn rate here and it made a lot of sense to me. You probably need to look at your burn rate and see what % of it is gong to taxes and how much you can defer using TSP. Taxes are most people largest expense and they don't even know it.
On the flip side of that coin, @Scott Trench has a great idea about useful net worth. Retirement accounts certainly do reduce your useful net worth until you reach 59 1/2 and in turn effect your ability to invest in RE.
Only you can balance those two ideas out to meet your goals. I too want to retire between 40-45 and I've realized that I'll need two 'retirement incomes' One, which is not in a 'retirement account' per se, to provide for my family from 40-59 1/2 and the other, more traditional, that can carry us until our end of days.
One quick word on TSP: NEVER get rid of it. There does not exist a retirement account which have lower fees to invest passively. My buddy who just got out told me you can transfer funds into your account once you leave active duty, which is great. You get your employer match and then move it to TSP and not pay 2% in useless charges.
Thanks Bill. I'll check out those articles.
We'll have to see how the market does in the next 5-6 years. I am not sure if it would make sense to just leave the TSP be forever (and shuttle other plans into it) or take funds out to put in self-directed IRAs.
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Ben Zimmerman
Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
9y
I am active military, have a TSP that I started prior to getting into real estate, and am rather happy with it. I don't get an employee contribution, but if I did I would certainly max it out. I started with the standard 401k since that was the only thing offered at the time and have since switched to putting new funds into the Roth plan since I plan on making significantly more money during my retirement years than I do now because I am constantly investing and growing.
A few things worth mentioning is that under some circumstances you can make a loan to yourself using the money in your TSP. This is how I got the downpayment to buy my first home. There was interest charged on the loan, but that interest is paid back into your TSP account.
It sounds like you are unsure if you will be making more, or less money in the future if you accept another high paying job. In this case I would suggest putting the money into a traditional 401k plan (you are already in a very high tax bracket so deferring this tax couldn't hurt anyway) and if you do end up making even better money later on you can start thinking about a roth conversion ladder which is a system in which you slowly transfer your money from a traditional plan, into a roth plan and can pull that money out with no penalties prior to age 65 so long as you start your ladder at least 5 years prior to when you start to withdraw the money.
Others have mentioned diversity, and the fact that stocks are very hands off way of investing which means 0 time taken away from your future fishing trips. But I find it useful for other things as well. Lenders typically want to see a certain amount of money set aside in reserves, and every lender I have worked with so far has accepted my retirement account as the reserves.
Lastly as far as retirement accounts go, TSP is fantastic. Some retirement plans are essentially scams and skim 1-2% off the top as various fees. TSP is one of, if not the lowest plans out there as far as fees are concerned (one of the few things government ever got right) and has a yearly expense ratio of 0.04% the last time I checked. This is the same rate that the 'super low cost' vanguard index funds boast about.
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Hau N.
CA · Member since 2017 · 153 posts · 74 votes
9y
@Andrey Y. Count me to support putting money in 401K. Like many said above, it's free money! I used to put money in TSP up to the matching portion but now trying to maxed it out. What is left over I save and invest in REI.
How are you able to put money in Roth when you're a physician?
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Andrey Y.
OP
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Hau N.:

@Andrey Y. Count me to support putting money in 401K. Like many said above, it's free money! I used to put money in TSP up to the matching portion but now trying to maxed it out. What is left over I save and invest in REI.
How are you able to put money in Roth when you're a physician?
I was referring to 50:50 traditional : Roth 401k/TSP, not IRA. I could probably still contribute to a Roth IRA this year, but that will likely be the last year I can sneak in below the income limits. After that, it will have to be backdoor IRAs.
But you're right, my specialty pays 2-2.5X more civilian compared with military. It's also a LOT busier (risk for errors) and taxed more on the outside.
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