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Updated over 8 years ago on . Most recent reply presented by

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Tony Hoffer
  • Investor
  • Los Angeles, CA
5
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To 401k... Or Not??

Tony Hoffer
  • Investor
  • Los Angeles, CA
Posted
Curious what everyone's thoughts are on the following 2 options: 1. Put money aside in 401k and take a nice tax savings now, but not be able to leverage the money easily for REI. With a Self Directed 401k I may have to put up to 50% down to leverage, which greatly diminishes returns. 2. DON'T put money in 401k, pay tax on it now and have less cash to invest, but I have much more flexibility with it. Option #1 makes the most tax sense as I'll be paying less in taxes and at least still have some minimal access to the money, but I *hate* that option as I much prefer liquidity. Thoughts?

Most Popular Reply

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Dmitriy Fomichenko
#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
6,265
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17,872
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Dmitriy Fomichenko
#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
Replied

@Tony Hoffer

Since you already have individual 401k plan established you can easily convert that into self-directed Solo 401k and use that for alternative investments. Yes you could pull those funds out of the 401k now to invest in your own name, but you will have to pay taxes and penalties on the amount you distribute prematurely which would not be wise thing to do. So it only makes sense to move those funds into self-directed account which will enable you to have virtually limitless investment choices.

You say that by "using 50% leverage in self-directed 401k diminishes returns"... Comparing to what? If you compare it with buying investment property using 100% cash - you are actually improving your returns because of the use of leverage. But if you are trying to compare this with buying an investment property in your own name using 20% down conventional financing you are comparing apples and oranges. The money is in your 401k not in your own name and conventional financing is now available there so this is a mute point. Funds are in your 401k and you need to look at ways you can put it to best use THERE (in your 401k).

Also keep in mind that buying investment property in your 401k is only ONE of the available options. You can do many other investments.  For example: you can become a private lender and be the bank for other investors or flippers and get double digit returns on your money without doing any work while your investment is secured by real property. And all incomes and gains that you generate as a result of this will be sheltered from taxes (not so if you did private lending outside of the 401k - all income would be taxes in the year you receive it). 

In addition to this Solo 401k gives you the ability to invest via Roth. If you are OK with paying taxes now you can invest in a tax-free environment for the rest of your life! You probably have 20 years before retirement, think about how much your investments can grow over this period of time, tax-free! I think it would make sense to put some of your funds in the Roth bucket of your 401k.

And the loan feature of the 401k will give you the ability to access some of your funds should you have a need before retiring tax and penalties free. 

I think you should work on building your personal investment portfolio which will provide you with immediate benefits, along with using self-directed Solo 401k which will be very powerful tool enabling you to build massive wealth over time.

Hope this helps.

  • Dmitriy Fomichenko
  • (949) 228-9393
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