Benefits of 401(k) over Property?
Investor · Katy, TX · Member since 2015 · 112 posts · 24 votes
Benefits of 401(k) over Property?
Most Popular Reply
Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
9yLong term average growth for the stock market is 9% per year. This also doesn't include the company matching that you might have. It's put in pretax, deferring tax until you retire and will be at a lower tax bracket. Because the money is pretax, you can set it at a level to maximize your company matching but not notice much of an impact in your take home...
If you're going to invest long term, you should always consider having multiple streams of retirement income.
34 Replies
- Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes9y
Originally posted by @Brianna H.:
...So the question is...what is the benefit of putting our money in a 401(k) over saving money for our next rental home? Obviously the 401(k) is sheltered from taxes until we are 59 1/2 (30 more years), but are there other benefits that I am not taking into account?
At a certain level, there isn't a simple response to the question. With a 401K, you are delegating your ability to retire in the future to someone who you do not know - the person or company managing the investment - and hope they do a good job flipping a coin with your money.
You may be just as better off also learning about investing in equities as you are learning about real estate and have a more hands on approach investing on both fronts. But that is just my take - you may be just fine delegating the management of your equities investment as I would in delegating plumbing work.
Its also probably not an either or decision - such as whether to invest primarily in equities or real estate. You do sort of need to diversify as you often may earn varying returns from equities as you could in real estate.
Both the 401K route and the rental strategy can be relatively slow and risky strategies; but then again some like is slow and some may like it faster.
- Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes9y
Two questions:
Are the IRS tax benefits of purchasing RE in a self directed 401K/IRA equal, the same or not as good compared with investing in RE outside of them, the traditional way?
(You can answer this either way - Roth 401k/IRA or traditional tax deferred 401k/IRA compared to investing in RE outside of them.)
What's the purpose of RMD's for IRA's ( required minimum distributions)? To die with a balance of $0.
What's the purpose of owning RE when you die???
OK, three questions:
Why is it acceptable to plan on retiring in a lower tax bracket????
- Accountant · Houston, TX · Member since 2015 · 87 posts · 33 votes9y
@Brianna H. In order to best help to answer your questions, I would need a better understanding of your personal goals. For example, a few benefits that 401k plans are touted for is tax deductible contributions in the current year and tax deferred growth.
As a CPA and real estate investor, I understand that with good record keeping and competent tax advisors on my team, that I can deduct business expenses related to operating a rental property to get tax deductions in the current year, and I can use a 1031 exchange to avoid taxes on the appreciation of my asset if I choose to sell it, which in essence equates to tax deferred growth.
I wish you the best with you investing. Feel free to PM me if you have any questions.
- 9yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
My friend writes the Mad Fientist blog. I have never seen the topic covered so completely as his article, How to Access Retirement Funds Early .
While real estate is my very most favorite investment vehicle, the stock market has been very good to me and I max out my 401k every year. The reduction of my taxable income is excellent, and my friend MadFi has given me tips to access it early if necessary.
Originally posted by @Kevin Coggins:
Originally posted by @Andrey Y.:
Originally posted by @Mike Dymski:
Originally posted by @Andrey Y.:
Originally posted by @Mike Dymski:
Most 401k plans have an employer match, which is essentially an immediate 100% return on your contribution. Many investors contribute enough to get the match and then invest excess capital in real estate.
It might be a 100% "return on your contribution", but its not a 100% return on anything else, more like 2%. In other words, if you invested the same amount and returned a 5% annualized return, if you now invested that same amount with a 100% employer match, your return would be 7 %or less. The math has been done. Lets not get it twisted :)
Huh?
If you invested a given amount of money over a 30 year period. Then, you invested that same amount of money, in the same exact equities over the same time and had a 100% employee match.. you would produce roughly 2% more return in the latter case over the lifetime of the investment. So, while the "100% return on your capital" sounds nice, your actual returns on your investment would be 2% better, at best.
Your math is off...by alot.
Say I invest 5k of money (10% of salary) into my 401k per year.
Company matches up to 10% of salary (5k)
That's 10k in my 401k and we can assume that we get 10% return (minus 1% for fees) so 9% return on 10k.
$10,000 * 1.09 = 10,900
$10,900 versus $5,000 is not 2%, it's 118%
Tony Robbins disagrees with you. He is a best selling author and is worth >$500M. The amount he spends on research for a single book he writes is in excess of your net worth I'd imagine. And he is PRO 401k/mutual funds by the way. What I mentioned is detailed in his latest major book "Money : Master the Game.
- Spring, TX · Member since 2016 · 243 posts · 203 votes9y
Originally posted by @Andrey Y.:
Originally posted by @Kevin Coggins:
Originally posted by @Andrey Y.:
Originally posted by @Mike Dymski:
Originally posted by @Andrey Y.:
Originally posted by @Mike Dymski:
Most 401k plans have an employer match, which is essentially an immediate 100% return on your contribution. Many investors contribute enough to get the match and then invest excess capital in real estate.
It might be a 100% "return on your contribution", but its not a 100% return on anything else, more like 2%. In other words, if you invested the same amount and returned a 5% annualized return, if you now invested that same amount with a 100% employer match, your return would be 7 %or less. The math has been done. Lets not get it twisted :)
Huh?
If you invested a given amount of money over a 30 year period. Then, you invested that same amount of money, in the same exact equities over the same time and had a 100% employee match.. you would produce roughly 2% more return in the latter case over the lifetime of the investment. So, while the "100% return on your capital" sounds nice, your actual returns on your investment would be 2% better, at best.
Your math is off...by alot.
Say I invest 5k of money (10% of salary) into my 401k per year.
Company matches up to 10% of salary (5k)
That's 10k in my 401k and we can assume that we get 10% return (minus 1% for fees) so 9% return on 10k.
$10,000 * 1.09 = 10,900
$10,900 versus $5,000 is not 2%, it's 118%
Tony Robbins disagrees with you. He is a best selling author and is worth >$500M. The amount he spends on research for a single book he writes is in excess of your net worth I'd imagine. And he is PRO 401k/mutual funds by the way. What I mentioned is detailed in his latest major book "Money : Master the Game.
He can disagree with me, and his net worth doesn't make him right...simple math proves me right, you can listen to him all you want. You can choose your $5k and I will choose $10k, that 2% difference lmao. I bet he made his 500m off people like you looking for some shortcut in life, but lacking basic math skills and common sense.
@Kevin Childers analysis is spot on. Yes, in the short term it is difficult to see past the instant returns of employer matching in a 401k. However, my own experience is instructive. Over the years I have maximized my contributions and along with employer contributions my real rate of return has been about 6%. Remember, the larger the 401k becomes, the smaller the growth impact of employer matching. 401k's make sense for many people because they are a relatively safe, 'forced' savings plan. They may not make sense, however, for the savvy investor.
Originally posted by @Kevin Coggins:
Originally posted by @Andrey Y.:
Originally posted by @Kevin Coggins:
Originally posted by @Andrey Y.:
Originally posted by @Mike Dymski:
Originally posted by @Andrey Y.:
Originally posted by @Mike Dymski:
Most 401k plans have an employer match, which is essentially an immediate 100% return on your contribution. Many investors contribute enough to get the match and then invest excess capital in real estate.
It might be a 100% "return on your contribution", but its not a 100% return on anything else, more like 2%. In other words, if you invested the same amount and returned a 5% annualized return, if you now invested that same amount with a 100% employer match, your return would be 7 %or less. The math has been done. Lets not get it twisted :)
Huh?
If you invested a given amount of money over a 30 year period. Then, you invested that same amount of money, in the same exact equities over the same time and had a 100% employee match.. you would produce roughly 2% more return in the latter case over the lifetime of the investment. So, while the "100% return on your capital" sounds nice, your actual returns on your investment would be 2% better, at best.
Your math is off...by alot.
Say I invest 5k of money (10% of salary) into my 401k per year.
Company matches up to 10% of salary (5k)
That's 10k in my 401k and we can assume that we get 10% return (minus 1% for fees) so 9% return on 10k.
$10,000 * 1.09 = 10,900
$10,900 versus $5,000 is not 2%, it's 118%
Tony Robbins disagrees with you. He is a best selling author and is worth >$500M. The amount he spends on research for a single book he writes is in excess of your net worth I'd imagine. And he is PRO 401k/mutual funds by the way. What I mentioned is detailed in his latest major book "Money : Master the Game.
He can disagree with me, and his net worth doesn't make him right...simple math proves me right, you can listen to him all you want. You can choose your $5k and I will choose $10k, that 2% difference lmao. I bet he made his 500m off people like you looking for some shortcut in life, but lacking basic math skills and common sense.
I actually diagree with Tony. 401k is one of the biggest scams in financial history. You have no idea what you are even invested in.
I dont like the idea of investing in paper, whose value could be influenced by a CEO in a boardroom making a decision because his wife just cheated on him.
By the way, I am a physician earning >3xxK per year. I dont think 13 years of post high school education is a "short cut in life" .. in fact its probably 'playing the long game' in the truest sense of the word.
I just read one of his books because I like to read.
Your math is still off. You aren't calculating what I am talking about.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Dmitriy Fomichenko:
Brianna, you are correct, when you put money into retirement account you get the tax break now and you can invest in tax-deferred environment. I understand your hesitation because you and I have no control over the stock market, which is the only investment options with conventional retirement accounts. However you should look into self-directed IRA, which would allow you to use your retirement funds to invest in alternative assets such as real estate, trust deeds, and much much more.
Good advice. I would add that if/when you ever change employers, you could then roll that 401k $ into the self-directed IRA and invest that in alternative assets as described above. That's what I did, except I also converted it to Roth first ... tax free income and capital gains on assets I control (or rather that my LLC controls) is pretty sweet!
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