401(k) and IRAs?

Question

I'm just getting started with life in general. I'm still in school and have never had a full-time job. My wife is in her first year as a high school teacher. We want to get started with investing.

We have a goal to be retired before we're both 40. We originally started this plan by deciding to try to max out her 401(k) and open an Roth IRA for me to max out as well. Then we learned about Real Estate investing. Now we're wondering if it's a good idea to keep contributing to our retirement accounts or should we stop contributing and use that money in RE where we know we'd get better returns?

Is there anyone who sees benefits from having BOTH a retirement account and RE investments or is it better to not have a retirement account and put all the money in RE? Thoughts?

Frank Jiang · Answer

At your age, the ROTH IRA will always be superior to other similar investment tools (401k, regular IRA). In the very least, she should stop contributing to the 401k (with the exception of any minimum amount to get employer match) and contribute to a ROTH instead.The money placed into the traditional IRA is not wasted, as you can tap $10k from the IRA to purchase a first home without eating the 10% early withdrawal penalty (note that this 10k will still be added to your taxable income).Saying that you know you'll get better returns in Real Estate is too optimistic in my opinion. The risk in real estate undertakings is significant. Also, investing too heavily in real estate causes you to be vulnerable to systematic risk in the real estate market. It is far better to add real estate to an overall portfolio to reduce your overall covariance.Read up on Modern Portfolio Theory. It is my opinion that you should use real estate as an asset class to balance out your overall portfolio, not as a way to chase spectacular returns.

Brian Eastman · Answer

@Ben DanielAs with many such inquiries, the answer very much depends on your situation.A tax sheltered retirement plan, especially if you build it up when you are young, can produce a considerable amount of wealth for your later years. Keep in mind, retirement plans are not limited to traditional stocks, bonds & funds, but may be invested into things like real estate and private lending transactions.If your wife's school district is providing a match, that is free money and you want to take advantage of that. Her funds would be locked up in the teachers retirement plan until she changes jobs, so your investment choices are limited, but between the deferral of income taxes and a match if one is present, you are getting a lot of additional return via the contributions coming from others or tax reductions.Your Roth IRA is a fantastic tool. You put a few dollars in each year and it grows for 20+ years tax free into a big pile of cash. I'd recommend you research putting that into a self directed Roth IRA. Maybe not now, but once you have enough gas in the tank so to speak, and can put that plan to work in real estate.Ultimately, the best thing for you to do would be to sit down with a good fee based financial planner (not one who earns commissions on what they sell, but who you pay for their guidance) and draw up a short/mid/long term strategy. Financial literacy in this country is laughable. If you focus on this at a young age and get yourself educated, you should have great success.

Account Closed · Answer

My clients can make between 10% and 20% profits per year on their home purchases. As far as 401K and IRAs I like Jim Hitt from American IRA Google him. This guy manages over $300,000,000.00 in assets. He knows what he is doing. He has managed a fund and has a solid knowledge for these types of events.

Account Closed · Answer

P.S Having a goal to be retired by 40yrs is epic!...REI will get u there for sure if not sooner ;D 401k wont

Account Closed · Answer

Hi BenWelcome to BP!Have you read rich dad poor dad by Robert Kiyosaki?... & the cashflow quadrant?these books are great for education on 401ks & IRAs.From what I have learnt I personally wont invest in them, because I dont have any control over them & they are subject to change.I want to be able to control my future with my money & get the best return on investment I can....With 401k it sets u up to be poor & reliant on the government.If u havent read these books u can actualy get a hold of the ebooks for free, I highly recommend them, they got me started on my journey & narrowed down my goals to keep it simple.All the best to you are ur wife on ur journey Ben, You have so much ahead of you, I only wish I knew at ur age what I know now, knowledge is power so all power to u Ben!Aloma :)

Steve B. · Answer

Looks like we have but another debate between the Kiyosaki/Cardone get rich quick active investment crew VS. the more prudent passive investment group. I think if you look at wealth built over time you will see which one proves more advisable over the long run statistically. I would suggest you weigh this advice based on people that actually have wealth to those who are just hoping to have wealth. Spoiler Alert: the Tortoise vs. the Hare metaphor is still accurate.Outside of tax advantaged (IRA) or free money (401k assuming match) once these are maxed than pursuing more hare like techniques may be advisable under the right circumstances.

Mark Nolan · Answer

@Ben DanielI recommend investing both retirement and nonretirement funds in real estate. That way you diversify and enjoy both the the pretax advantage that tax shelters such as 401k plans offer as well as the capital gain treatment that applies to investments made with nonretirement funds.

Dmitriy Fomichenko · Answer

@Ben DanielIt's great that you and your wife start thinking about future goals early.Contributing to a 401k is a great way enjoy tax benefits, and take advantage of any matching contribution from your employer if available. Once you build up a decent amount in your 401k, you can roll it over to a self-directed IRA later and use the fund to also invest in real estate. There have been many posts about this topic on BP (invest in real estate using an IRA/401k). You can do a quick search and learn more about this option.

Franklin Romine · Answer

@Ben Daniel Grant cardone says 401ks are for average people. I agree with that but think it should be a piece to our puzzle. When i started a day job i was investing in my 401k and real estate. Having multiple flows of income is way cooler than collecting just a social security check. I always had the mindset that i'm a hired gun when i had a day job and they only owed me the last two weeks of pay. Frank