Should I reduce my 401k contributions to zero?

Question

Just finished reading Set For Life. 401k's let your wealth compound tax free but if you're in a higher tax bracket later in life, you're differing your tax bill to a higher tax bracket.

I also want to accelerate my accumulation of cash to use towards buying real estate. I think I'll get a much higher return on investment saving more cash now and buying leveraged properties than sticking the money into a target retirement fund in my 401k.

Darius Ogloza · Answer

If your employer matches your contributions to any extent, you would be making a grave mistake.  Contribute to the match at least! It's like picking money up off the floor.

Remember that required minimum distributions do not start until 72 - you will have more than a decade to remove as much or as little from your 401k penalty free as YOU choose (hence, essentially picking the rate at which you will be taxed).

Jason Crittenden · Answer

@Benjamin Sussman I think you answered your own question.

Different folks will have different views on this. Read Tax Free Wealth by Tom Wheelright and you’ll hear unequivocally yes you should take it out. Or 401Khaos...

Read Dave Ramsey’s books and he’ll tell your to leave it in.

I think the best advise is, if you believe in your heart YOU are a better manager of your money and your destiny then consider taking it out.

Right now, you can take up to $100,000 our PENALTY FREE because of the CARES ACT.

So if you’re ever going to do it, now is the time before the end of 2020.

Be well brother.

Anthony Wick · Answer

@Benjamin Sussman. You know why a 401k is a great tool, other than the obvious part about free matching contributions (sometimes)? It's the same reason why overpaying income taxes is technically not the best idea, but could actually "make you money". Human Nature and Discipline. 401k money is taken from you before you see it. Most people won't save that extra money if it reaches their bank account. Most people won't save that extra income tax that wasn't taken out of their paycheck. We know this, because, most people are woefully short on retirement savings.

So, look deep into yourself and determine what you have the actual capability to do. 401k means "easy" investments. Literally zero work, or almost zero work. And, of course, always contribute up to the matching contributions before you do anything in life (I know you said your employer doesn't match, but it still needs to be said for anybody reading this).

I max out my 401k first, then I do real estate investing, then I do a Vanguard brokerage account. Also, just because you're in a higher tax bracket late in your career does not mean you will be in one at retirement. And nobody knows what the tax brackets will be like next year, let alone in 10, 20, 30 years. We can only make decisions with what we know today.

Levi K. · Answer

@Benjamin Sussman Hello Benjamin, as you can see, there are as many opinions as there are people 😉 . Here is my story and experience:

I started with Susie Orman mentality - cut your credit card 💳,  contribute to retirement account and blah blah blah.

Very quickly I realized that I don't want to wait for ever to be able to "enjoy" my golden years.

Today I still contribute to 401K as little as needed to get maximum employer's matching. It help me to grow my 401K a little faster (before tax + contribution). Once I have enough money for a downpayment,  I borrow  money (not withdrawal) against my 401K tax free. (Please study what are the risks involved by borrowing the money 💰 from 401K). Every paycheck I pay the loan down plus some interest back to my 401K. After the loan is paid off, I am ready to repeat the process.

I would suggest that you listen to Get Rich Education podcast number 197 and 112 and get inspired.

Regards,

Levi

Zachary Ray · Answer

I would say real estate is an excellent vehicle and you should be putting a lot of emphasis on growing your portfolio. However I wouldn't put all your eggs in one basket and risk not being diversified. I would still contribute a little to grow that long term so you have multiple options when it comes time to retire.

Aaron Zimmerman · Answer

On top of what everyone has said, you can access these funds earlier than you think. There is something called a roth conversion ladder where you can transfer funds from a traditional to a roth. This triggers a taxable event but if you're in a low bracket, you can avoid paying a lot of taxes. You just have to wait five years before accessing.

I would also agree that you should contribute up to the match as that is free money and part of your compensation. It's a guaranteed return.

Jake Tucker · Answer

@Benjamin Sussman

I’d change it to a ROTH and just put aside about $500/month if at all possible.

It will compound to a nice little safety cushion later on in life if RE suddenly crashes when you decide to retire

Greg Moore · Answer

@Benjamin Sussman One option is to reduce your 401k contribution to the employer match level — nothing more, nothing less. In this approach, you’re optimizing yourself returns on the 401k, and then redirect the amount you’ve reduced it by into Real Estate investments.

Zachary Ray · Answer

Be more diversified, that is what I meant. Nothing else.

Zachary Ray · Answer

A. If your making that kind of money I doubt someone would be on a forum asking about contributing to a 401k or taking money out of one. B. Notes can be called for numerous reasons and you can lose it all if over leveraged. Many people have lost all their money as real estate does have it's risks.

Should I reduce my 401k contributions to zero?

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