401K Contributions: Yes/No?

Question

Hi BiggerPockets Community,

I have a question that I'm trying to debrief in terms of optimal investing strategy, and hope I can get some advice from the peers.

I currently have a stock portfolio that I myself direct and it's been generating returns very well - consistent 15%-20%. I have this portfolio during my college years. And now that I just graduated and started to work for a tech company in the Bay Area, I was given the option of contributing to my 401K. They will match 100% for the first 2% and 50% for the next 1% of my paychecks.

When I calculated the pros/cons, I figured that with the doubling money as a pro, compared to the cons of not being to direct the investment choices and returns are typically average at 7%, I decided to not contribute. Another reason that got me escape from this is that I avoid illiquidity aspect that the 401K contributions cause. I have put a good amount of money into my personal portfolio, and I'm trying to save cash on the side in case I need to make a quick jump.

However, when I came cross the community's posts, I realized that I can borrow the 401K contributions to purchase real estate, which I'm trying to pursue (for either investing or buying my first house).

So as of now I'm in the middle of the path trying to figure out if it's worth putting more money into 401K. The deadline to apply is coming due soon, so I'd appreciate any help! Thank you!

Dan Armich · Answer

@Anh Nguyen - I always suggest that my new hires invest at least the minimum to get a full match. Sounds like that is 3% in your case. Regardless of what you want to do with that money, your company will give you an extra 3%. Also, remember that the 3% we are looking at is 3% of your salary today, and tomorrow too. By consistently contributing that 3%, you will save 3% of your first 100k salary and 3% of your 250k salary later on.

Hemant C. · Answer

I too work in tech in the Bay Area and I chose to always max out my 401(k) as the loan options are actually pretty good if you take taxes into account.

My plan allows me to borrow 50% of the value of my portfolio paid back over 10 years for the purchase of a house. At my marginal tax rate of 24% federal and 9.3% state, I would have only seen 66.7% of the money if I chose not to contribute. At the current yearly limit of $19,500 - the loan would let me access $9,750 and not contributing would let me access $13,000 on top of not having an extra payment. Your actual numbers

With the Bay Area prices, I didn't think an extra $3,250 an year would have made a difference to me while I would still have another $9,750 invested in the market. Plus, the repayment is not considered by lenders in your DTI.

Of course, your actual numbers may vary based on your 401(k) plan, tax rates and investing goals.

Taylor L. · Answer

In the FIRE community the consensus is generally that one should max out retirement accounts to take full advantage of not only the match, but also the tax deferral. Investing in a 401(k) does not lock the money away forever. Down the road you can roll it into a Self Directed IRA and use that to invest in real estate, but in order to do that you typically have to leave your employer.

At the end of the day it's a very personal decision. You know your goals better than anyone else. $100 into your 401(k) (for example) isn't $100 off of your take-home, so that's something to keep in mind.

401K Contributions: Yes/No?

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