401k vs Invest in real estate for early retirement?

Question

Hello,

Today I read "Set For Life" by Scott Trench. It got me thinking about my current situation with my 401(k).

My background: I am 25 years old and am focused on absorbing as much information as possible about real estate investing. Currently I rent, but here in the next 4 months I am planning to purchase a duplex in my area and house hack it living in one side with roommates while renting out the other side. After that I will focus on multifamily properties and grow my portfolio from there. My goal is to achieve financial freedom by age 35. Right out of college I was a commercial loan officer for a couple years and now I work for a financial tech company that caters to banks. I contribute 6% to my 401(k) as that is what is required to get my company match.

My plan is to keep my 401(k) balance where it is (not withdraw) as I don't want the tax burden, but my questions is... Would it be better to stop contributing to my 401(k) and use that money to invest in real estate instead? My thought process is that if I am wanting to "retire" by 35, investing in my 401(k) doesn't seem to align with that goal very well as that capital is locked up until I turn 59.5 and can make withdrawals. Wouldn't it be better to put that money toward real estate to accelerate my investing early?

Thanks,

-Joe

Alina Trigub · Answer

@Joe A Warner

Congrats on deciding early in life on your long term goals. In terms of your question, there is no right or wrong. You will hear a ton of opinions but the decision is ultimately on you!

Here's my thought process: do you get "free" money as a part of your job's 401k program, meaning do they match? If so, that is a minimum you should do to take advantage of it! Aside from it, there're tons of software products that will do the calculations for you. Try personal capital.

Best of luck!

Robert M. · Answer

Might want to look into maxing out an HSA, if you plan on retiring that young, heath care cost could be a problem.

Kata Walters · Answer

@Joe A Warner you could invest passively with a Self directed IRA and not pay taxes on your gains :) have you heard about the rule of 72? Matt Faircloth does a great YouTube on it , but he discusses how partnering with an active investor ( like myself haha ) you can become a millionaire and not have to raise an arm ! it’s pretty cool . Check it out it’s a good watch :)

Jason Powell · Answer

I won't comment on what you should do, but I will say that you can access 401k funds penalty free in an early retirement. The rule 72t, what John Crabtree references above and refers to as "SEPP" is, in my opinion, and very poor option for a 35 year old. What i would view as a much more attractive option is backdoor Roth conversions, and then withdraw penalty free after a 5 year hold period. You can Google this and watch tons of YouTube videos about it, so I won't launch into all the details here.

John Crabtree · Answer

I would continue the match and get the free money, its a 100% immediate return.  Your 401K money is not fully locked to 59 1/2.  You can use the SEPP (Standard Equal Periodic Payment) process to access early.  A few hoops to jump through and you are limited to withdrawing a relatively small percentage, but its still a way to do it.

Shera Gregory · Answer

Great question! Here are a couple of things to think about as you make your decision. When you leave your current company you can roll over your 401(k) into a Solo 401(k) that you create in a business entity you own. This is not difficult .. check out Sense Financial and other companies who will do all the paperwork for you. Once you are able to control the investments you can do things like private money lending with these funds. That would give you another way to network with other investors in your local market. It doesn't make much sense to own real estate in a retirement account since you don't get the tax benefits of depreciation, writing off expenses, etc. But having the funds to lend to other people will bring you into the orbit of those you can also do deals with in other ways. I don't mean a direct quid-pro-quo which could be considered a prohibited transaction but simply "being a player" in your market.

I would also recommend finding out if you can designate your current contributions as ROTH contributions. The company match will be non-ROTH but you may be able to make contributions now that you can use to invest which will not be taxed when you are ready to withdraw.

Chris Salerno · Answer

Joe, I hope all is well. Congrats on the success you have made. I am 24 and focus heavily on investing in Large Multi-Family. I would highly recommend looking to invest in large multi-family syndication. You can also use your 401k to invest in a large syndication. I think it would be a great way to scale very quickly. You will also receive higher returns depending on the operator and deal.

I hope this helps. Let me know if you have any questions.

Looking forward to your success.

Whitney Hutten · Answer

https://podcasts.apple.com/us/...

Also, the match is used as an employee retention tool... so factor in vesting timelines, fees associated since you have to invest in the 401k program to get it, and opportunity costs.. The match has many strings attached.

Whitney Hutten · Answer

@Joe A Warner You are getting some great tips on how to leverage your 401K.  However, rereading your post, it looks like you asked should you stop contributing to your 401K and invest in real estate instead.

One could argue if you should contribute up to the match.  While it feels like 100% return, over time, it may not prove out that way.  There is plenty online to debunk that contributing to get the match is worthwhile.  That said, if you don't have another strategy in place for the short-term, it's probably a good bet to continue to match.

If you are going to contribute to the 401K, I'd concur with doing so in the Roth part.  That way you can pay the taxes now and you could pull out your basis later if you wanted (after you leave the company of course).  Work with a CPA on this.

Now to your question, should you stop contributing and invest in real estate?  Yes, you could take control of your monies and invest in an SD or Solo environment, however, you still have to play by the government's rules and the money is still locked up.  You also, can't touch the cashflow now for your personal gain either.  Booo!  That, I think is the question you have to answer for yourself.  Do you want cashflow NOW, build assets NOW, to fund your lifestyle NOW (and later)?  Or do you want to build assets for someday and hope you get there?

For me, I elected to take the majority of my money into my own control through cashing out and self-direction and build a portfolio of assets that funds my lifestyle now AND later. That is true freedom.

Jeremy England · Answer

I've been maxing my 401k for the past 8 years.  Did the match for the previous 3 years.

When one considers the match, and the market gains in the total ROI. Right now I have about a 145pct ROI.

If you want to compare that with a REI, if you plan on BRRRR the property, then your ROI will be much greater.  However, Risk is higher as well.  If you lose on a REI, your losses tend to be larger.

I look at my 401k as my "low risk" investing (even though its entirely in common stock funds).  I'm comfortable with a great deal of risk.  Plus I look at market dips as means to purchase more with my money.

I've managed to get this far with maxing the 401k and rei at the same time so my advice is to do similar

401k vs Invest in real estate for early retirement?

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