I own Rental properties; continue to max out IRA/401K?

Question

Hello, I'm 47 and I'm almost 2 years into my REI journey - which was initially funded thru savings. My goal is to use REI for passive income for retirement. I currently own 5 properties; all but one are cashflowing (the other is vacant and going thru a rehab/remodel - which I'll need to dip more into savings to cover). I also max out my ROTH IRA contributions, as well as what I have for a version of 401K for my wife and I.

What tools / resources would you recommend to help me in the decision to continue to invest as I have - letting the REI support itself and max out IRA/401K, or stop those IRA/401K contributions and use them for 1 of 2 things (or both): 1. Pay down mortgages faster 2. Build cash reserves faster for continued REI investing.

Thank you!

Greg Scott · Answer

I would vote for #2.

With real estate, I can get much better returns with much less risk and much less volatility than stocks can provide. The 401K lovers out there should know that real estate can be more tax-favored than a 401K. As a real estate professional, I haven't paid any federal income tax in two years and my income is higher than ever.

Paying your mortgages down quickly just saves you interest costs, which means you are making a 3-5% return on your money. Those are terrible returns.

Jason Hokaj · Answer

Greg and Layne - thank you both. There are certainly some nuance to all of this. I was hoping to hear about places/programs to find guidance so that I could explore nuances that I may or may not be considering given my unique situations and concerns. Maybe a better / simpler question - Should I be looking to hire a CPA at this point to help me or is there resources(s) that anyone would recommend before that?

Layne T. · Answer

In general I agree with Greg above.However. Some nuance.If you and your wife have 401k's where your employer matches contributions, you should max those out to the level where they match (i.e. if they give you 100% up to 3% of salary, put in 3%). The rest I would also vote put towards real estate.

Account Closed · Answer

Jason,

Another option that I think you may be interested in. When are you looking to retire, and how much do you have in your Roth? You could roll over your Roth IRA into a self directed IRA (tax free), and use the self directed IRA to purchase rental properties. Works pretty similarly in the fact that you can't pull money out until you are 59.5 years old. Rental payments would go into the IRA as well. Feel free to send me a message if you have any questions.

-Jack Faysash

William Joel Idleman · Answer

Jason, I'm a pro real estate investment advisor. It's weird, I know. Every other advisor I know tries to talk clients out of moving money out of the office. I have clients ask me this question quite often. The answer is it really depends on you and your goals. I personally believe the best investment vehicle is real estate. I advise some clients who have nothing in the stock market and all in real estate and vice versa. So, I'll share with you highly general advice.

401k - take your match

ROTH - if you want max this out, go for it. I like tax free returns, but I don't like the penalties that come with early withdrawals. I also don't like that you can't loan against IRAs.

Property - You can eventually build tax free income with a hard asset, as you already know. Throw everything else you have at this. This is my number one choice and I advise clients to move on property more often than the other two.

Jason Hokaj · Answer

All - thank you for your time and insights!

Basit Siddiqi · Answer

I like real estate over retirement plans - You have flexibility on when / how you can use your funds

Christina Yoon · Answer

I think your next stop is a CPA, specifically one who can give you a "lens" on your overall financial picture and can understand the "nuances" to balance your goals.

I own Rental properties; continue to max out IRA/401K?

I own Rental properties; continue to max out IRA/401K?

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