Should RE investors maximize IRA contributions

Question

Hello,

Should real estate investors maximize IRA contributions?

To answer this question I will assume the following conditions regarding the investor:

1)  Aged 40.

2)  High income as a physician: currently in the top tax bracket.

3)  Future non-retirement assets invested in real estate will return 18% post-tax.  This is a leveraged return taking advantage of real estate depreciation tax rules.

4)  IRA assets will be invested in stocks/bonds with an assumed annual return of 8%.  (IRA returns will not be magnified by leverage.)

Benefits:

1)  The assets in the IRA grow tax free.

2)  Diversification.  If the investor's non-retirements funds are all in real estate, then IRA investments in stocks/bonds helps diversify.

3)  The IRA investment has less risk because it is not leveraged.

Disadvantages:

1)  Leveraged real estate return of 18% is greater than the non-leveraged IRA stock/bond return of 8% (see assumptions above).

2)  The marginal tax rate of a real estate investor may not drop during retirement because their real estate income will continue in retirement and because taxes may increase in the future.

This is a complicated question.  I have my own opinion but it tends to differ from the opinion of financial advisors.  So I wonder what other real estate investors think.

Thanks!

Wells Mangrum · Answer

Thanks Joseph.  That was an interesting discussion that you linked.  Much of that discussion centered on whether or not to contribute to a 401k plan if the employer matches your investment.  That factual scenario does not apply here.  But it gives me a good feel of the general opinion of investors.  Thanks!

Joseph M. · Answer

There was a recent and interesting thread on this topic recently , you might find it helpful if you haven't seen it yet.

https://www.biggerpockets.com/forums/519/topics/462225-is-scott-trench-wrong-retirement-plans-vs-real-estate