Author Topic: Roth IRA vs House savings  (Read 7069 times)

JamesL

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Roth IRA vs House savings
« on: February 28, 2013, 05:52:23 PM »
I hate tough decisions, and I'm up against one right now.

To make calculations easy, lets round down and say I save, after expenses etc, 15k a year.
I want to buy my first place (which will be a rental property out of state) in about 15-24 months.

I have 18k saved in a fund for the house so far.
I maxed out my Roth IRA in 2011, and just put in $500 into my 2012 Roth. I have until April 15th to max out my 2012 Roth IRA if I want (4500 more). Then I can max out my Roth IRA for 2013 (5,500). I'm getting a $3000 tax refund soon from 2012.

Do you think it's worth essentially putting 16k into my Roth IRA between now and when I want a house, or keep that for the payment of the house? I'm not making much now so $5500 a year feels like a much bigger hit, than it would in say 5 years when I'm making (hopefully) much more. Although with that said people always look back and wish they started younger. I've made 20% return on my 2011 Roth IRA already (I started contributing as soon as I could).

Essentially all I need to do is put in $5500 a year into my Roth and then any employee matching, to get me from 59-dead. I plan on being FI in 12 years (35 years old) by living off rental income and some stocks.

Any enlightenment would be appreciated :).

Edit.. I feel like this is one of those, win win situations for either decision lol.
« Last Edit: February 28, 2013, 05:54:25 PM by JamesL »

Another Reader

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Re: Roth IRA vs House savings
« Reply #1 on: February 28, 2013, 06:43:11 PM »
Where's the future rental property and what are the details - estimated price, down payment, rent, expenses, etc.?

I would max out the Roth in your shoes.  You will never get that opportunity for tax free growth and withdrawals plus the flexibility of withdrawing the contributions tax and penalty free again.  There will be plenty of rental deals in the future.


JamesL

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Re: Roth IRA vs House savings
« Reply #2 on: February 28, 2013, 07:37:23 PM »
I have more research to do, but I think I'd either do a fixer-uper foreclosure/short-sale/auction with cash, fix it up and rent (costs of around 50-75k estimated), for 800-1200 a month (big gap but I haven't pin pointed location yet), or leverage with 20% down on a 60-100k place, renting for comparable to above example. In Nevada or Texas most likely, but markets change so I'll know when I'm closer to buying.

I definitely like leverage, and know it's potential. The only thing about paying cash is if I could get a killer deal on a fixer-uper and had to pay cash.

Thanks for your input.

Another Reader

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Re: Roth IRA vs House savings
« Reply #3 on: February 28, 2013, 07:59:17 PM »
Can you find specific properties available today that meet yout criteria?  Have you identified markets where such properties are readily available?

The reason I ask this is that the bottom of the market is long gone in Phoenix and Las Vegas.  I can't speak to Texas, but in Phoenix you would not be looking at the numbers you list, unless you are in a war zone.  The impression I get from Arebelspy's grumblings about the lack of inventory is there are not a lot of deals in Las Vegas, either.

For example. I bought a house in the Phoenix area for $65k in early 2011, and put around $3k into it, including appliances.  It's rented for $800.  Today that house would sell for around $115k.  I'm not sure the appreciation in Las Vegas is as high, but there has been some substantial appreciation there as well.  Before you decide to pursue rentals, make sure there are properties that will meet your investment criteria when you are ready to invest.


JamesL

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Re: Roth IRA vs House savings
« Reply #4 on: February 28, 2013, 10:17:44 PM »
I have seen places on realtor.com, and places like zillow that do meet my criteria. The main issue is I don't know how legit they are and I'm not familiar with the area. I'll probably do a solid few months of research when I get closer to purchasing. I'm pretty confident I can find a place for under 100k that will rent for 900-1k per month.

kris1

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Re: Roth IRA vs House savings
« Reply #5 on: March 01, 2013, 12:35:39 AM »
Roth IRA is such an important retirement investment tool that it now has its own holiday. Earlier this year, Jeff Rose, a financial planner and Good Financial Cents blogger, hosted an online event, the Roth IRA Movement, which he plans to make an annual celebration. He rallied 145 other personal-finance writers to spread the word about the star savings account and to inspire rookie investors to open their own accounts. For more details check here http://money.msn.com/retirement/8-reasons-you-need-a-roth-ira.

Another Reader

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Re: Roth IRA vs House savings
« Reply #6 on: March 01, 2013, 05:37:21 AM »
If you are relying on Zillow, where less than 30 percent of the listings in the Phoenix area are actually available, you are not getting accurate information.  If you are really interested in real estate investing, why not join a local real estate investing group and get to know some of the people that are actually investing?  Maybe you could learn some of the ins and outs of investing from active practitioners, including some that invest out of state.  Since you live in San Diego, you ought to read Jeff Brown at Bawldguy.com.  Maybe even give him a call and run your plans by him.

In your shoes, I would max out the Roth now, and spend some time getting an education in real estate investing.

smalllife

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Re: Roth IRA vs House savings
« Reply #7 on: March 01, 2013, 06:02:51 AM »
Max out the Roth.  You can always buy a house, but the window for Roth IRAs has a deadline.


Zee

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Re: Roth IRA vs House savings
« Reply #8 on: March 01, 2013, 07:57:32 AM »
Agree with the others.  Take advantage of the Roth while you are able.  Allow time and compounding growth to work their magic.  If needed, your investment could be withdrawn tax free (withdrawl of gains would be taxed). 

@Another Reader provided similar advice to me in a recent post.  I am in a similar situation where I was contemplating a small real estate investment down the road in addition to several other financial moves.  Personally, I need to get more familiar with the nuances of the real estate investor market.  Focus on what you do know and take advantage of the Roth.

rugorak

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Re: Roth IRA vs House savings
« Reply #9 on: March 01, 2013, 01:56:58 PM »
Another vote for the Roth. Tax free growth and withdraws are huge.

I am curious why you are looking out of state? Land-lording in abstention can be difficult and costly (so I am told). If you were planning on moving and then buying then ok. But it doesn't sound like it. Looking for something more local would seem to make more sense. Especially if you don't make that much. But maybe I am missing something?

JamesL

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Re: Roth IRA vs House savings
« Reply #10 on: March 02, 2013, 08:55:06 PM »
Thanks for the insight everyone. I'm pretty set on maxing out my Roth, unless something else jumps out at me. I figure I'll just do all of my paychecks into the Roth + my tax return, and that will max it by April, then work on 2013's. My house savings fund will definitely take a hit but sometimes you gotta do what you gotta do.

Oh and Rugorak, I'm looking out of state because the numbers for investing in real estate aren't great where I am. The one thing I have going for me is the raise in equity here in San Diego, but I don't plan on selling the places so that doesn't really make a difference. When I look at a place for 80k that can rent for 900/ month out of state, vs a 150-250k+ condo that rents for 1k a month (plus HOA fees for life) around me, it's hard to enjoy the 150-250k condo.

I have been poking my head around places northern and eastern California though, so nothing is totally off the table right now :). I definitely plan on sticking to the 50/50 rule though so I don't get over my head with the house.