401k vs REI: time for a change?

Question

Hey friend :)I am currently maxing out my 401k, which leaves almost nothing left to save for a down payment. This made sense: my company offered a 25% match on 100% of my contributions. However, I am now planning to leave before any of that match can be vested, essentially giving me a matchless 401k. Should I keep maxing it out, or reduce contributions going forward and save for a rental property, even though I'll be taxed more?Thanks in advance!

Rachel Luoto · Answer

@Evan Thomas, your point 4 above is exactly why REI appeals to me over traditional retirement savings. I like an asset that will produce cash now as well as into my retirement, where I will have the flexibility to guide my own investment more than rebalancing a portfolio once a year until I'm 65 ;)

Dmitriy Fomichenko · Answer

Not with the Roth! Contributions are, but the earnings will come out tax-free! It is possible to contribute $100,000 and grow that to $1MM so the $900,000 gain would be tax free if done inside of a Roth IRA or 401k.

Mark Nolan · Answer

@Rachel LuotoI would continue to contribute as much as possible, and once you separate from the employer sponsoring the plan, transfer the 401(k) to a self-directed IRA or self-directed Solo 401(k) which can then be invested in real estate. All rental income will flow back into the IRA solo 401(k). Following are the similarities and differences between the solo 401k and the self-directed IRA.The Self-Directed IRA and Solo 401k Similarities Both were created by congress for individuals to save for retirement;Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;Both allow for Roth contributions;Both are subject to prohibited transaction rules;Both are subject to federal taxes at time of distribution;Both allow for checkbook control for placing alternative investments;Both may be invested in annuities;Both are protected from creditors;Both allow for nondeductible contributions;Both are prohibited from investing in assets listed under I.R.C. 408(m); andThe Self-Directed IRA and Solo 401k DifferencesIn order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;To open a self-directed IRA, self-employment income is not required;In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;The solo 401k allows for checkbook control from the onset;The solo 401k allows for personal loan known as a solo 401k loan;It is prohibited to borrow from your IRA;The Solo 401k may be invested in life insurance;The self-directed IRA may not be invested in life insurance;The solo 401k allow for high contribution amounts (for 2015; the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);The solo 401k business owner can serve as trustee of the solo 401k;The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;Pre-tax IRA contributions on reported on line 32 of Form 1040;Pre-tax solo 401k contributions are reported on line 28 of Form 1040;Roth solo 401k funds are subject to RMDs;A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);Roth IRA funds are not subject to requirement minimum distributions (RMDs);The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; andAt termination, the self-directed IRA is only required to file a form 1099-R.

Anthony Angotti · Answer

HI @Rachel LuotoI take a combination approach. My company matches dollar for dollar up to 8%. So I contribute 8% and save the rest for REI. I used to contribute 20%, but when I saw the potential to have an investment that is a bit more firm and with leverage ability I cut it down tremendously. I would suggest the same to anyone. Get the match and invest the rest in other sources (not just REI)

Trevor Ewen · Answer

@Rachel LuotoIt has to be completely contextual. Anyone who suggests that you should be subject to one-size fits all investment advice is a little foolish. I think there are good principles we can all rely on: live below your means, take more risk when you're young, favor safer income-oriented investments to speculative growth investments.I'm also glad it's different for each person because it provides opportunity within our real estate community. Old investors looking to get out of management inevitably sell to younger investors. Who made the wrong decision there? In an ideal case, nobody did. They are just both at different stages in their investment careers.

Evan Thomas · Answer

I'm very new to REI, but I have a couple of thoughts on this. 1. A Roth IRA is a great way to invest tax-free for retirement. I'm a fan of the Roth's ability to tax you at the beginning, and then you keep the returns that compound for decades until retirement. Warren Buffett has written a lot on compounding, and it can be a very powerful tool for growth.2. The 401k is a great replacement for pensions, but generally you'll only get the boost to retirement solvency if part of that is getting matched. 3. The average American retires with about $500,000 in their 401k. If you can live with a conservative 5%, you can have $25,000 a year (with the assumption of no market downturns during your retirement years). Even if you're well ahead of the average, you'll need a pretty big 401k balance to live moderately in retirement. 4. If you put aside some money to invest in real estate, and you follow the base cash flow from Brandon Turner of $100 of cash flow per month per rental unit, you can get paid while your renters pay for your investment (the property). So not only are you saving for retirement, you're getting paid to do it now. And with cash or built up equity (from the renters paying down your mortgage), there are dozens of strategies for expanding your real estate portfolio. 5. There are ways (depreciation, 1031 exchanges, probably others I don't know about) to shield your real estate investments from a high tax rate that you can read about in the forums and on the Bigger Pockets blog. If you're worried about taxes, I'd give some of those articles a read before you choose one way or the other. If you're willing to follow the long real estate investing learning curve, it can create the safety and security that other investments simply will not over the long term. Cheers,Evan

Rachel Luoto · Answer

@Cameron Tope, I wish I was in your situation! As a young professional - emphasis on young - my paycheck only stretches so far. Working on that though ;)To add clarification, I'm not looking to take money out of my 401k or Roth IRA, at least as of now. I'm just considering the impact of reducing future contributions.I will run the numbers :)

Rachel Luoto · Answer

@Ali Boone, great to hear from you as always :)@Trevor Ewen, I like how you think about investment temperament changing, I'd never thought of it like that but it makes perfect sense that once you are actually living off investments, you are more interested in preservation than growth

Ali Boone · Answer

Well the reality is all the money is going to be taxed at some point, 401K or not. Normally I'm all for real estate over 401Ks (I gave up on those years ago and don't feel secure with one a bit), however, the point above about a the self-directed or solo-K is a good one. You can still buy properties with the money you contribute, and it's certainly not a bad way to go. But you'd really have to sit down and analyze the difference in numbers. Especially if you aren't going to get vested, it may not be worth the contribution. Who knows.

Rachel Luoto · Answer

Thank you everyone! I appreciate the diverse perspectives, you have given me lots to think about. This is why I love the BP community!