Author Topic: Tax Advantaged vs Non  (Read 3127 times)

Mikeshollen

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Tax Advantaged vs Non
« on: March 07, 2015, 08:56:30 PM »
Hello! I am new to the MMM forums. I am trying to decide how to determine where to put the money I save each month. I recently got a new job that will enable me to max out a 401K and a ROTH IRA every year with a little left over to pay off my car and start saving beyond the tax advantaged accounts. My plan is to save up enough to put down payments on rental properties with 30yr fixed mortgages and positive cash flows ($75k single family homes is the goal). I figured I would try to acquire 9 of these financed (you max at 10 and my primary residence is financed), then try to buy about 5 or 6 in cash, then use the cash flow to pay down the financed portion of the mortgaged rentals (thus decreasing risk as I get closer to financial freedom). The income less expense from 15 of these seems like more than enough to retire on.

So my question is, with only $500-$1000 a month to put towards buying these rentals, should I slow down the 401k? I love how passive index funds are and I feel wasteful not saving on as many taxes as I can, but I can't use that money until I am 59.5 and I can probably get the real estate portfolio built 10-15 years sooner than that.

rtrnow

  • Bristles
  • ***
  • Posts: 323
Re: Tax Advantaged vs Non
« Reply #1 on: March 08, 2015, 08:20:09 AM »
If you are saving for down payments in the next few years, then I wouldn't have that invested in stocks tax advantaged or not.

As for accessing 401k money before 59.5, look around the site. 72t, roth conversion. It's pretty easy to get to that money without penalty once you have left your job.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Tax Advantaged vs Non
« Reply #2 on: March 08, 2015, 08:30:16 AM »
Max the 401k, skip the Roth, now you can buy your first rental quicker but you are still taking advantage of deferrals. And yeah, a Roth Pipeline or 72t will get you early access to 401k so don't worry about that.

Mikeshollen

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Tax Advantaged vs Non
« Reply #3 on: March 08, 2015, 11:33:57 AM »
I am not suggesting that I would put down payment money in the stock market. I was just wondering if I should reduce the 401k or ROTH IRA funding a bit to increase the speed at which I can buy rentals.

NathanDrake

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Tax Advantaged vs Non
« Reply #4 on: March 08, 2015, 12:10:50 PM »
Why not just invest it all in the market to diversify your exposure?

Having to manage a lot of rental properties using leverage increases your risks and headaches, although the returns may be greater.

Mikeshollen

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Tax Advantaged vs Non
« Reply #5 on: March 08, 2015, 02:10:15 PM »
Well I believe there is some diversification by having real estate as part of my holdings in addition to stocks. Chances are, if something bad is happening to the stock market, it could be good for the rental market.

I am also interested in the gains. The goal is to fund 401k and ROTH IRA with real estate eventually so I can get all the tax advantages. I like real estate because it has more dimensions than stocks.
1. Housing cash flows - often much better than dividends
2. Housing appreciates much like stocks
3. Housing can be depreciated which is a big tax advantage once I have maxed the retirement accounts
4. Locking in to fixed rate debt below the 'real' inflation level means the government will destroy some of my debt owed

I am just trying to figure out if I should put a little extra in the real estate buying fund.

Mikeshollen

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Tax Advantaged vs Non
« Reply #6 on: March 08, 2015, 02:17:34 PM »
That last post was confusing.

I am filling my 401 and IRA with no load low expense index funds. I want to have that AND rental properties in addition to it.

NathanDrake

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Tax Advantaged vs Non
« Reply #7 on: March 08, 2015, 02:38:18 PM »
Sure, cash flows are better than dividends, but that's largely due to leverage, which again increases risks; secondly, housing does NOT appreciate much like stocks. Long-term housing appreciation as roughly at, or slightly above, inflation (1% real, if that). Long-term real return of global stocks is 6-7%. Further, built into equity funds are companies focused on real estate development. By owning index funds, you get better real estate diversification.

Not trying to suggest you alter your thinking necessarily, but only become a landlord if it's what you desire to do and you understand all the risks involved.

For many, like myself, investing passively doesn't involve any additional hassles or headaches and allows me to enjoy my free time away from work.


Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Tax Advantaged vs Non
« Reply #8 on: March 08, 2015, 04:02:00 PM »
There are plenty of threads here debating real estate vs stocks. Both have advantages and disadvantages. If someone intends to invest in one more than the other I wouldn't try to talk them out of it. You can do both. I do.

Good luck figuring out your optimal path Mikeshollen.