The biggest missing ingredient here is a whole life insurance policy with cash value. Taxable expense to your business, can borrow and pay yourself back tax free, and use the funds to buy more properties. Here are my recommended order of investments: 1.) Whole Life Policy with cash value 2.) Real Estate investments that produce passive income and increase in value 3.) Solo 401k 4.) Employer 401k only contributing to the company match.

Does your employer match your 401k contributions? If they do, you should contribute to the aamount they match. An instant 100% return (the match) is pretty compelling.

Btw, just as a side note, it *IS* possible to borrow from an IRA, just not in the traditional sense... My wife and I have a lot of money from old 401k plans that we have rolled into self-directed IRAs. Based on current IRA regulation, once per year (once every 365 days), you are allowed to take a distribution from your IRA; assuming the money is rolled over to a new IRA -- OR RETURNED TO THE EXISTING IRA -- within 60 days, there is no taxable event or penalty. So, if I have $200K in an IRA, I can "borrow" the money for up to 60 consecutive days each year for whatever purpose I'd like, and then return it to the IRA with no tax or penalty owed.

Bryan, Kevin Kaczmarek is referring to a new wave of retirement planning that hinges upon manipulating whole life policies, more specifically universal whole life. There is a book a lot of advisers give out for free called "Tax Free Retirement" so they can sell you insurance. You can probably find a copy or read the reviews on amazon to learn most of what you need to know. The premise is you can take out a loan against the cash value with little or no interest and do not need to pay it back during your lifetime as long as you stay under the contribution maximum. Because the money is in the form of a loan it doesn't get taxed. You can easily read the book in one sitting to learn more (skip the first dozen chapters, they are fluff). In theory this strategy would work, but after reading the book and I wasn't convinced. The two big questions I had were 1)If this strategy catches on and the government closes the loophole of paying no taxes when borrowing against a life insurance policy then you are screwed and 2) You are committed to a set large payment that remains the same even if you lose a job or your circumstances change for the worse. Maybe there is an answer to these two concerns, but it wasn't addressed in anything I read. To be fair, I think there are some who have succeeded with this strategy, but call me a skeptic.

Chris beat me to this but I will reiterate. I disagree too. There are many benefits to a 401k over an IRA. The company match, the higher contribution limits, tax differals, and BORROWING provisions. IRA's do not allow for borrowing provisions. If you have a 401k from an employer and then leave that employment, don't roll over to a SDIRA, roll into a solo k plan (self administered 401k plan). You have more benefits with that than you do an IRA and getting checkbook control is very easy. There is no one right answer to the OG question, but I personally believe that a healthy combination of the two is best. Hit your 401k (especially when you have company matches - that is free money, increasing your returns without risk, and ALSO invest outside of a qualified paln. I do caution that holding RE in a retirement plan is not the best use of the capital, I believe investing in notes or making loans with those funds is a better use. RE holding allows for paper tax deductions (depreciation) and in a qualified retirement plan, it is already tax advantaged, so you lose the RE depreciation advantage on buy and hold.

"It absolutely depends on the match you are getting from the employer. The only real benefit of a 401k is the match from your employer. You should contribute up to whatever your employer matches 100% above that you are better off investing somewhere else. " Hi Luis, I disagree with you in that that is the only true benefit of 401k contribution. You have the ability to defer taxes on up to 16,500k is it in 2012? That equates to several thousand dollars of earned income you do not have to pay taxes on now. The other big benefit is it also can help you out with your allowable passive RE investing losses. We are allowed up to 25k if we make up to 100k of w-2 income, from 100k to 150k this gets phased out. SO lets say you make 116k and you max out your 401k this give you ~99k of taxable w-2 income which allows you to take advantage of the full 25k passive loss allowance where as if you did not contribute at all you would lose a portion of your allowable losses. Well I shouldn't say lose you would carry it forward and eventually you could use it down the road. I like to max out my 401k from my employer because A. I can afford to as I have a fair amount of passive income coming in from RE rentals and B. I think it is a nice diversification to invest in stocks and securities and not just real estate. Real Estate is great while it is passive income it is still hands on management where stocks and bonds are much more passive IMO as you sit back and watch your companies either do well or not so well lol. Less control then real estate but less headaches as well LOL I have begun investing in quality companies paying a nice dividend and have been very happy with the outcome. While Real Estate will always be my area of expertise I always liek to look at other ways to bring in passive income as well... just my opinion..... Chris

The basis is in excess of 6000 posts for many years. No; I'm not speaking for everyone. How would anyone ever post anything on the site if they were tasked with speaking for everyone. Any yes....this is NOT the retail investment crowd. There are probably 10,000 other ways to structure transactions that do not require non-recourse loans and do not involve buy-and-hold investments.

I like Kevin Kaczmarek list too!!

I think I'm with Luis here, I'm very uncomfortable gambling on future tax rates and the future structure of the tax code, and it is a gamble, make no mistake. With the building fiscal calamity, future tax rates and deductions will be under constant upward pressure. I'd rather pay the 28% devil I know now, and hold funds on an after/tax basis. Don't you think Washington is already looking at the arguably absurd depreciation deductions permitted on real estate?? This deduction will be under pressure as much as all others, particularly as the rental stock in the nation grows sharply with the declining home ownership rate. Same with doing tax-free exchanges. Again, I'd rather take my cards off the table on this issue. Plus, there is much greater flexibility with your investment options in an a/t account, such as borrowing with prudent leverage and reaping great tax benefits from the depreciation on 4x as much property as you have capital. You can't accomplish this effectively in a qualified retirement account. Basically, I want to increase the amount of real estate I acquire at these generational low prices. I have come to have much greater comfort owning quality rental real estate, acquired at great prices, with 30-40% gross rent yields, than the vagaries of the stock/bond markets (having taken sizable hits, like many, twice in the last 15 years in equities). I do agree wholeheartedly that you should contribute up to your company match. This is just one of those constantly recurring topics where we all continually throw our two cents in, that's what makes the site entertaining and informative.

You don't pay taxes on it now but will have to pay possibly more taxes on later when you pull them out. While if on a Roth IRA they get taxed now but then grow tax free and when you pull them out, you "should" be in a higher tax bracket and will not have to pay taxes on them. I did not say not to contribute to the 401 I said to contribute only that which the employer matches because yes you get both the match and the tax savings you talk about. However there are employers that let you put say, up to 10% of your paycheck but they will only match 1:1 up to 4%. Therefore in my opinion is not worth it to do the 10% contribution, just the 4% and the rest to your Roth IRA.

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Updated over 12 years ago, 08/30/2012

Account ClosedPoster

Real Estate Investor
Ephrata, PA

Investor Mindset

401K or Not?

Account ClosedPoster

Real Estate Investor
Ephrata, PA

Posted March 30, 2012 22:22

Hello all.....

I'm just about to buy my second multifamily property and one of the advices that my uncle gave me was to max out my 401k. Now, don't get me wrong, he owns a franchise and also has about four rental properties....

However......I don't want to wait until I'm 68-70 to retire! Am I wrong to think that the money that I could put into a 401k, that I could invest it into real estate properties?

I think that this this my retirement. I really only see myself working for the next 5-10 years.

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