All Forum Posts by: Steve Chan

Rather than saying, "low rate of return", I'll just use numbers. 

Let's say you have $100,000 in your 401(k) and it returns 6% on average over 5 years. At the end of 5 years, the balance should be $133,823:

If you instead, pay the 10% fee and you're in a 24% tax bracket, then you'll have $68,400 to reinvest: 

If you invest this $68,400 and earn 17% IRR, 8% COC, and a 2X equity multiple over a 5 year hold period, then your net income should be $136,800 and now you have cash that you can reinvest, rather than that portion of your money in a 401(k). If you've invested this money in real estate, the $114,912 that you receive upon sale will be taxed as capital gains, which is lower than your 24% tax bracket in this scenario.

@Cody Kauzlarich I also have a 401(k) that I contribute to, to take advantage of my employer match, as well as an HSA to pay for my family's health care with pre-tax dollars. I'm not advocating to eliminate or avoid these programs, although I can see why you'd assume that by my line of questioning. What I am advocating is to create a strategy that does not make your 401(k) your primary retirement vehicle. I believe that planning to save a predetermined amount of money for your retirement is risky because of inflation, potential changes to the tax code, and the simple fact that you may outlive your savings. Also I think mutual funds are more susceptible to systemic economic changes due to their diversification across multiple industries. In my opinion, real estate is the ultimate hedge against inflation because you can borrow money at a low, fixed interest rate, and repay that fixed amount over time as the dollar becomes less valuable. 

@Jorge Lopez I think taking a loan from your 401(k) and repaying yourself the principle and interest is one of the biggest advantages of the 401(k), if you deploy that money into a vehicle that earns a higher rate of return than what your 401(k) is generating. 

@Terrell Garren thanks for the perspective. As you get closer you get to 59 1/2, the less attractive paying a fee to access your funds becomes.

@Raul Carrillo I also contribute enough to get my employer match. Over the past 15 years, it has served as a great vehicle for saving money due to its automated nature. There are other pros to the plan, but I believe exploring your options with it is a valuable exercise.

@Allan C. Thanks for catching the stepped up versus stepped down error, but I’m not sure that I follow your point about diversification. If you pull money out of a retirement account, you can diversify that money as much as you please. Are you referring to diversification in terms of multiple retirement accounts?

@Chris Seveney You are correct. I'm basing my questions on a W-2 job, but I'm appreciating the feedback about the self directed options. Thanks for your input. 

@Jaspreet Baveja Thank you, I did not know you can lend funds to investors through a ROTH or Self-Directed ROTH IRA and I completely agree with your warning about paying the fees to withdraw from your 401(k) in order to reinvest. That is a strategy that must be employed with a great plan in order to forecast a greater outcome than investing through your retirement account; however, I will say that borrowing from your 401(k) to reinvest does seem like a prudent strategy for a sophisticated investor.

@Jaspreet Baveja As far as I'm aware, investing in a real estate syndication as either a limited or general partner is a form of owning physical real estate. I have not explored notes or lending through a 401(k). How does that work?

It's not recaptured if you keep rolling it for the duration of you life, correct? I'm under the impression that you can keep rolling your depreciation into new investments through a 1031 exchange, and then your heirs can inherit your assets on a stepped-down basis.

Also, the other factors that I'm considering in my original question are tax brackets when I retire, the time value of money, and the overall state of our economy. What if the government decides to increase taxes when you are able to start taking your distributions? What if the dollar continues to devalue over time?  What if our economy enters a recession/depression when I retire and I lose a percentage of my 401(k) when I'm dependent on those funds?

Our rising national debt and The Fed's massive injections of cash into our economy seem to be very strong economic indicators that are concerning when considering future taxes and inflation. Also, I can't control the year in which I turn 59 1/2, so if a 401(k) is my primary retirement vehicle and we are in a recession/depression at that time, then I've put myself in a tough position by depending on my 401(k).