@Shawn Q. Very well said! Great points! Let's use the Median income earner as the example, I still think the Roth IRA is a great vehicle for wealth building. The Median income earner can use the Roth IRA as a self-directed and trade options with it and earn 70-80% returns pretty easily year after year, yes it may be more risky but you rarely get that kind of return in real estate and never without alot of WORK. I also know someone who buys non-performing notes in their Roth IRA, and easily gets 100-200% returns, all tax-free! Yes you can't access the money until 59.5, BUT it's delayed gratification.
$5500 at conservative 50% return over 5 years (stocks or options trading): $41765. Income = 0
$5500 outside of a Roth IRA same 50% return but you get hit with 25% federal income tax + state (lets say 0% as in the case of NV): $27032. Income = $2062/year (after taxes)
$5500 into real estate, generous 20% COC return (deferred tax from depreciation and other write offs, so no tax for 1st 5 years) = $13686. Income = $1100/year.
The numbers are overly simplified but my point is, tax takes a huge chunk out of your compound interest equation. So the question becomes what are you after? Cashflow (income) or equity (wealth)? And someone mentioned asset protection, everything inside your Roth IRA is protected whereas your real estate outside of a retirement account is not.
401(k) is different story, most company 401(k) is managed by large mutual fund companies with very limited fund options and high fees, mine averages 4-8%, it's pathetic. My stance on the 401(k) is: if your income is below $75k, do not contribute to your 401(k), take the money pay the taxes & invest it elsewhere. If your income is higher than $75k, you are in a higher tax bracket, and at that point it's a way to offset your taxable income to a lower bracket. Just know at some point, when you leave your job, you can transfer to self-direct, or convert to Roth, or better yet, borrow against it and invest in something with much higher return. BUT @Scott Trench is absolutely right, no income until 59.5. NOTE: Tax bracket is extremely important once you pass $100k/year income, your write-offs get phased out starting at the $100k mark (means less deductions), so you pay even MORE taxes.
My strategy is invest in real estate with savings for passive income and some level of wealth building. Roth IRA for high risk, high reward vehicles such as stocks, small caps, and options trading - wealth building only. 401(k) for lowering tax brackets only, not as an investment vehicle, at least for me. If someone else has successfully used 401(k) as an investment vehicle, I'm all ears.
