[Editor's Note: Today we're going to take a deep dive into a topic that was briefly covered recently on the WCI Podcast. I thought this topic lent itself particularly well to the Pro/Con format so I have asked Dr. Kenji Asakura, to take on the Pro side (since he has actually taken money out of retirement accounts at least once to invest in real estate) and I will take the Con side of the argument. Dr. Asakura and his wife, Dr. Letizia Alto, blog at Semi-Retired, MD about achieving financial independence through real estate investing. Dr. Asakura and I have a financial relationship in that we help him sell (and are paid to help sell) his online course a couple of times a year.]
Dr. Kenji Asakura
Pro: Raiding Retirement Accounts Is Reasonable in Some Circumstances
By Dr. Kenji Asakura
Conventional wisdom says that all employees should maximize savings using retirement accounts. I generally agree with this, especially when an employer offers matching funds. In fact, my wife Letizia and I have been participating in our employer's 401(k) plan for years. However, the question we are exploring today is whether or not it makes sense to tap into your retirement account and perhaps even liquidate it entirely.
For the purposes of this pro/con article, let’s focus on reasons why you might consider liquidating your retirement account. Now keep in mind, liquidating your retirement account comes at a high cost. First, there’s the 10% penalty. Then, you are taxed on the money you pull out, both at the federal and state level. So why would anyone want to liquidate their retirement account? Here are some reasons:
#1 You Are Planning to Claim Real Estate Professional Status
Let’s start here because we don’t believe anyone should consider liquidating their retirement accounts unless they have a really good plan for addressing the hit from taxes and the 10% penalty.
This is where real estate professional status comes into play. My wife and I have liquidated our 401(k)s because I have real estate professional status and, with the depreciation from recently purchased rental properties, we can shelter all of the liquidated funds and pay zero income taxes on it.
So we minimize the damage of liquidating our retirement accounts to just the 10% penalty, which we feel confident we’ll surpass in our first year with our rental properties because we invest in properties that return far greater than 10%.
Becoming a real estate professional isn’t the only way to overcome the taxes and 10% penalty. Maybe you take advantage of an opportunity zone fund or a conservation easement. Maybe you have an amazing business idea that you anticipate will set you up far better than your retirement accounts can. Whatever may be the case, be sure to have a plan for overcoming the taxes and 10% penalty before liquidating your retirement accounts.
# 2 You Want to Retire on More Than What the Calculators Tell You
If you’ve ever gone to a financial advisor, you’ve seen a retirement calculator. They take the amount you are contributing to retirement and apply an interest rate and with compounding, your nest egg grows. For most of us, this amount is relatively decent. But what if you aspire to retire on more than this amount? What if the number you see in the calculator doesn’t even come close to helping you achieve your dreams?
Let’s use a sports analogy.
Relying on your retirement account is like a team that plays defense the entire game. You’re playing a low scoring game. You're not playing to win, you’re playing not to lose. You run the same play all game. You’re predictable. Now back to the real world. You’re a physician and you are saving for retirement. Just like I can tell you that a team playing defense won’t score a lot of points, I can tell you exactly how much you’ll have in retirement when you’re 59 ½. It’s completely predictable. And the number is “comfortable,” but in the big scheme of things, it’s not a lot.
Maybe that’s great for some but many want more than the predictability of a low scoring game. They envision more for their retirement. They want to make more so they can do more. And your retirement account is a substantial source of funds that can be used to pursue an alternative investment strategy.
It really comes down to what you want in life and realizing that you have choices. You don’t have to play defense and run the same play over and over again. You can choose to play offense and run the score up if you want. The possibilities are endless, but only if you play to win.
# 3 You Want to Enjoy Your Money Now, Rather Than Having It Tied Up in “Money Jail”
We all enjoy our freedom, so why would you willingly put your money in jail? Instead of choosing to put your money in an alternative investment vehicle, for example, investing in cash-flowing rentals, you willingly choose to put your money in a retirement account that penalizes you if you take your money out before an arbitrary 59 ½.
Some of us want more degrees of freedom than retirement accounts can offer. However, most default to retirement accounts because you don’t know that other options exist. Oh, and keep in mind, just like retirement accounts, the federal government wants you to invest in real estate. That’s why real estate has such favorable tax treatment in the form of tax deferred growth using 1031 exchanges. And, at the same time, your money isn’t in jail for what might feel like a life sentence.
# 4 You Want to Have Another Source of Income (from an Investment or Business), So You Aren’t Reliant on Your Employer
It’s hard to talk about 2020 without bringing up COVID. For many doctors, 2020 has been a time of tremendous uncertainty. Some of you got furloughed. Others had to close their offices. Many experienced a significant drop in income. Our own hospitalist team had their bonuses taken away, which represents about 20% of our income. And oh, by the way, our hospital system received over $5 billion from the federal government in COVID-related aid.
Even if you didn’t experience a loss of income, you probably know someone who did. So, for the first time, I think all of us doctors realized that our jobs and incomes aren’t safe. We can’t rely on them like we thought we could. And, for the first time, many of us started looking for alternative sources of income. But the reality is that in order to make money, it helps to have money to invest. So some, especially the students in our real estate course, started considering tapping their retirement accounts.
While we don’t encourage this in our course, we also don’t discourage it. We say it’s a personal choice and the decision should be made carefully after taking into consideration the pros/cons, which for us is one of the goals of this pro/con article. Dr. Dahle’s perspective is completely valid and his thoughts should be weighed carefully as you make this decision.
# 5 You Want to Achieve Financial Freedom More Quickly
I think one of the things that often gets lost in discussions about retirement accounts is the fact that they don’t give you any income. The whole idea behind these accounts is that any gain is reinvested and there are severe penalties for tapping the income before 59 ½.
So you save and save and create a nice nest egg, but it doesn’t pay you one cent until you’re no longer young. But what if you could invest in something that puts money in your pocket each month? Even sweeter, what if that income was tax-free? You could then choose to live off of that income while you’re still young enough to enjoy it, or you can reinvest it to achieve the same compounding growth you achieve with retirement accounts.
The nice thing about doing something different is you have a choice. What we do is a mix. We use some for ourselves so we aren’t always delaying gratification, and we reinvest some. As our cashflow grows, we don’t have to reinvest as much of it and we have more for ourselves to enjoy TODAY, not tomorrow. It gives you an opportunity to achieve financial freedom well before 59 ½.
# 6 You Believe Taxes Are “On Sale” Now
One of the touted benefits of retirement accounts is that you’ll pay less taxes on your retirement income because you’ll be making less. The problem with this argument is that it assumes tax rates will stay the same.
But what if taxes go up dramatically? Why would this happen? Well, Social Security is going bankrupt, and oh, by the way, those $1,200 COVID checks aren’t free. We’ll be paying for them at some point (or maybe our kids will). Some argue that taxes are on sale now. They say that the tax rates will never again be this low.
If that’s the case, doesn’t it make sense to pay today’s tax rates rather than a much higher rate in the future? Of course, you’d have to account for the 10% penalty but some might believe that the increase in tax rates will exceed even the penalty.
I acknowledge the fact that you can do a Roth conversion and pay today’s tax rates. But your money is still in jail. So the point is if you are planning to liquidate, better to liquidate now while taxes are on sale and you have more time to grow your alternative investments than wait until later.
# 7 You Realize That Retirement Isn’t the Goal
Finally a different twist on the pro/con argument. What if you don’t plan on retiring because you love what you do? My wife and I achieved financial freedom but keep on working on Semi-Retired MD and our real estate portfolio because we enjoy both. We’ve been there. We’ve semi-retired and traveled the world. However, what we realized early on in our “semi-retirement” was that, without continual growth and contribution, we were not fulfilled.
This means that we seek out opportunities to continually challenge ourselves to grow and we do what we do from a place of contribution. This is why we work so hard to ensure that our students are successful. So for us, retirement accounts are irrelevant. We’ll keep working, on our terms, as long as we live. So we’ve liquidated some of our retirement accounts and plan to liquidate the rest as new investment opportunities arise. It’s not for everyone, but it really depends on what you want – do you want to play defense all your life or do you want to play to win?
Con: Most Doctors Should Not Tap Their Retirement Accounts
By The White Coat Investor
It always makes me worry a little bit when I see a book, course, guru, insurance agent, or financial advisor suggest taking money out of a retirement account in order to do something else with it. It often means that person is trying to sell you something. A classic example is Douglas Andrew, who under the brand names of either Missed Fortune or Live Abundant has been suggesting for years that people pull money out of their retirement accounts (and home equity) in order to buy Index Universal Life Insurance, a poorly performing but high commission product similar to whole life insurance. You can see why these folks selling something would try to get you to tap those sources of money in order to buy it—that's where a large percentage of your net worth resides!
Benefits of Retirement Accounts
The benefits of investing inside retirement accounts are numerous, particularly for a high earner such as a physician. The primary benefits are tax advantages. For a tax-deferred account like a 401(k), you get a large upfront tax deduction (usually the largest deduction for a doctor), and ongoing protection from the tax drag of having the income component of your return taxed as it grows. In addition, you can switch investments without any tax consequences. Perhaps the great benefit of a tax-deferred account for a doctor is the ability to save on taxes at a very high marginal tax rate during the peak earnings years and then use withdrawals during retirement to “fill the brackets” during retirement. Contributing at a marginal rate of 32-37% and then withdrawing at an effective rate of 10-20% is a winning formula. With a tax-free (Roth) account, a doctor does not get the up-front tax break nor (typically) any arbitrage between tax rates, but she does get tax-free withdrawals, allowing her to set her own tax break in retirement.
In addition to these tax benefits, retirement accounts facilitate estate planning with the ability to name beneficiaries and the ability for heirs to stretch those retirement account benefits out for an additional ten years after your death. There are also serious asset protection benefits for retirement accounts. In every state, 401(k)s are essentially bankruptcy-proof, and that protection extends to IRAs in many states.
Downsides to Retirement Accounts
Are there downsides to investing in retirement accounts? Sure, but they pale in comparison to the upsides in the vast majority of cases.
One downside is that if you want to use that money prior to age 59 1/2 (55 for 401(k)s once you leave the employer), you had better have a good reason because, if not, you will have to pay a 10% penalty in addition to any taxes due. Fortunately, the government has created a long list of good reasons, including early retirement, that allow you to get at that money without paying the penalty.
You also have to start taking the money out of tax-deferred accounts (and paying taxes on it) and Roth 401(k)s beginning at age 72, whether you want to spend these Required Minimum Distributions or not. But the percentage of the account that must be taken out in your 70s is small, and it isn't like you cannot just turn around and reinvest the money in a taxable account if for some crazy reason you saved up a bunch of money for retirement but do not actually want to spend it on retirement.
A more serious issue with retirement accounts is that not every investment out there is easy to invest in (or even allowed in) a retirement account, and you generally cannot use leverage to invest in a retirement account. There are workarounds here, but they can be a bit onerous.
For example, a self-directed IRA (or even better, a self-directed individual 401(k) because it allows you to avoid Unrelated Business Income Tax on leveraged investments) can be invested in a wide range of non-traditional investments. Since money is fungible, it is also possible for the leverage to be held outside the retirement account in the form of a mortgage on your primary home or loans against other properties or a margin investing account.
The Price of Early Withdrawal
The main problem for a physician who wants to pull money from retirement accounts to invest in real estate is the heavy price required to take the money out of the retirement account. In my case, I would pay a 37% federal income tax plus a 5% state income tax plus a 10% penalty to take that money out. 52% total! So in order to get $100,000 out, I would have to pull out $208,333 and pay $108,333 in taxes just to invest $100,000 into real estate!
Paying 52% on a withdrawal that you might be able to only pay 20% on later (not to mention let it keep compounding in a tax-protected and asset-protected account for decades more) is pretty foolish. It would take massively higher returns on the new investment in order to make up for taking that tax hit.
Investing in Real Estate Without Withdrawing
In addition, it is not like you cannot invest in real estate inside retirement accounts. I mentioned above the possibility of using self-directed IRAs and individual 401(k)s to buy individual properties, but they can also be used to buy syndications and private real estate funds.
Sure, you will not get the benefits of depreciation or the ability to write off the associated property expenses, but you will still get to pay for those expenses with pre-tax dollars (in the case of a tax-deferred account) and, over decades, the retirement account associated tax protection on the income will add up to more than the benefits of the initial depreciation.
Publicly traded real estate, such as individual REITs and the mutual funds that invest in them (like the Vanguard REIT Index Fund) are also widely available. Some real estate investments that do not benefit from depreciation (such as a hard money/private loan fund) are incredibly tax-inefficient and provide much higher after-tax returns when held in a retirement account.
In addition to these methods of using retirement account money to invest in real estate, you can also take a loan out of your 401(k). The terms on these are much less onerous than they used to be. You can borrow the money for up to five years and you no longer have to pay it back within 60 days of leaving the company—you have until tax day of the following year to pay it back. Plus, for 2020, the amount you can borrow out of the 401(k) has doubled to $100K from the $50K (or 50% of the account balance, whichever is less) limit that was in place prior to the COVID associated downturn.
There is also the option that most physician real estate investors choose. They simply use their retirement accounts to hold their stock, bond, and REIT mutual funds and use their taxable money to buy properties, syndications, and equity funds. Not enough taxable money to meet your real estate goals? Try working more or spending less and you soon will likely have more than enough.
What About Super-Savers?
Drs. Alto and Asakura are real hustlers and expect to be in the highest bracket in retirement, so they do not expect to see much of a tax rate arbitrage between their tax rate at contribution and their tax rate at distribution, and, in fact, think it might be negative, especially considering their current state tax rate (0%). However, there is an alternate solution to just pulling the money out and paying the taxes due plus the 10% penalty. You can do Roth conversions on that money. You will pay the same tax bill, but you will not owe any penalty and you can now take advantage of all of the tax, estate planning, and asset protection benefits of a Roth IRA for decades. While the typical physician is not in this situation, many super-savers are.
Real Estate Professional Status
Letizia and Kenji are also careful to point out the main reason why they thought this scheme would work for them, despite fully acknowledging that it will not work well for most doctors—they qualify for Real Estate Professional Status (REPS). Under current bonus depreciation laws, one receives a ton of depreciation upfront when you buy a property. This can be used to offset real estate income, essentially allowing for tax-free income, at least until that depreciation is recaptured at the time of sale. However, that income cannot be used to offset your earned (usually highly-taxed physician) income UNLESS you qualify as a real estate professional. As you can imagine, qualifying for that status can make a huge difference on your taxes, and it certainly has for these two doctors. They used the depreciation from their investments to cover the taxes (but not the penalty) on their early retirement account withdrawals. But I think it is important to understand just how difficult it is to qualify for REPS as a practicing physician. There are basically two rules:
- You must work in real estate more than 750 hours per year
- You cannot work in anything else more than you work in real estate
All in all, I am in full agreement with these two fine doctors that a circumstance where pulling money from retirement accounts in order to pursue an entrepreneurial pursuit including real estate investing is a good idea can exist. I just think it is so rare that the rule of thumb to not raid retirement accounts for anything but retirement should still be the default solution.
What do you think? Under what circumstances would you raid your retirement accounts to start a business or make an investment? Comment below!
Featured Real Estate Partners
Really enjoyed this discussion and format!
I actually liquidated a Roth 457 of mine from residency to purchase a cash flowing rental property upon graduating residency. With that, there was no penalty but I had to pay taxes. I knew that this timing meant my taxes would be lower than they would be for a long time once I started my attending job. Also, this 457 had relatively poor fund choices. The property we bought is now cash flowing over 17%. So the exchange for me was a win.
BUT, most importantly, this was all worked out in my financial plan beforehand. I use a hybrid approach and both contribute to max out retirement accounts and invest in real estate. My wife and my retirement goals were set beforehand and this decision accelerated us towards them. Otherwise we would not have done it. Same principles in surgery, measure twice cut once.
Great discussion!
Thanks for sharing your experience. 457s can be unique- no early withdrawal penalty, sometimes lousy investments and withdrawal options, and sometimes the employer isn’t very stable.
How many properties/rentals does one need to qualify for REPS, and can you use a property manager and still qualify. This assumes one works part time, so it is more than 50% of time doing real estate.
There’s not a number, and even if there were, I don’t think that’s the major hurdle. The major hurdle is doing your doctor gig less than your real estate gig while still making enough money to support your lifestyle AND have enough money to invest in real estate.
But the idea is to move rapidly through the time period where the IRS could possibly have any question that you’re not a real estate professional. You don’t want to sit on just two properties for 6 years while claiming REPS. So maybe this year you have 2 doors and next year you have 10. Then you can claim “Yea, I was only managing one property that year but I had to look at 18 to buy the other 2 I have now.” Keeping a time card might also help. Clearly, when you have 100 doors it shouldn’t be hard to make this claim, so long as you are not working 1800 hours in the clinic. Remember it’s 750 hours in real estate AND less than that in anything else.
How closely does the IRS monitor how much time you spend as a REP?
Also, in addition to brick and mortar properties, does spending time looking into Real Estate syndications also count toward the time required to be a REP?
Thanks
I don’t think anyone is looking that closely, but you do have to certify that you do it. It’s just a box you check in Turbotax. What they would ask for in the event of an audit I don’t know. But if I only had 2 or 3 properties, I’d be sure to have pretty careful documentation of how I spent my 750 hours that year.
I don’t see why you couldn’t count time looking into syndications though. Not sure I’d try to claim it if that was the only thing I did all year.
Thank you for a great discussion! This has been among the most frequent questions on Facebook groups this year, since CARES Act waived the penalty for withdrawing from the 401k. It’s great if one has a solid plan to invest that money, and not so great if one’s doing it from FOMO. Our saving goal calls for savings in a taxable account beyond maxing out our retirement accounts. So we just invest that taxable money in real estate.
Good point. Up to $100K can be withdrawn this year penalty (but not tax) free.
I don’t understand why someone who wants to be a professional real estate mogul would bother wasting 11+ years of their prime in college, medical school, and residency. All that miserable, soul-killing work just to do something you could have done straight out of high school like a childhood friend of mine who has done really well with rentals.
All of us here do have a way to play offense: go to the office, see patients, and make money. Even working part time hours, a doctor can make bank showing up a few days a week and spending the majority of the hours killing time in front of a computer.
Do most people truly know what they want to do with their life at 18, 22, or even 26? I sure didn’t and in some ways I still don’t. Life is uncertain, things change.
I agree a much better pathway to a real estate career involves skipping college, medical school, residency, and years paying off the student loans acquired on that pathway. That said, lots of people guess wrong at 18 what will make them happy at 35 and 45.
It’s not that some docs want a different career or didn’t really know what they wanted to do with their lives. It’s that some of us have discovered that the best way to stop trading time for money and feeling trapped in the medical profession is through real estate. I wanted to be a doctor since I was five, I will probably never stop practicing in some capacity. I love what I do and I am really good at it. However, I am also a 50 year old family doc living in a HCOL, physician-saturated state working in a state facility and barely kissing 200K in salary, also went through a divorce and am way behind where I should be on retirement savings. Not to mention still paying back student loans (yeah, I know…). For me, taking a total of 215K out of an SD401K of mine and an old annuity of my 2nd husband’s (a fixed annuity that caps at 6% that he rolled his pension into after a corporate downsizing years ago) and purchasing the duplex and two triplexes in Ohio that we are closing on tomorrow that will immediately start paying us $5000 a month in rental income is an awesome way for us to control our financial future that doesn’t depend on me just slogging away in a fulltime job forever and socking away money into the stock market. As Kenji notes above, these properties (made possible by liquidating some retirement savings) will start paying us NOW and for as long as we own them. My husband, now retired, will give us REPS status. We plan to do a cost segregation study and take bonus depreciation on the properties as well which will offset any taxes/penalties from withdrawing from retirement accounts. And, more importantly, we will have some room to breathe, get rid of those stupid student loans that have been hanging around forever, consider working less than fulltime before my 16 year old leaves home in two years and build more property wealth by borrowing against the properties next year to purchase more. I can’t just “make bank” working extra hours so this is an excellent option for me. Also, I think for many of the docs who get interested in real estate, it becomes as fun as a hobby. I read about real estate, frequently listen to podcasts and webinars and have enjoyed any real estate conference I have been to more than any medical conference I have ever attended. There are endless ways to enjoy and profit from investing in real estate; for some of us, “raiding your retirement” is the best option to get into the game.
If it works out, awesome; but real estate has considerably more risk than a simple index fund portfolio. There is the possibility that it could fail and tank your retirement. A physician I know really well in our community is still working into old age because she made some real estate investments that in hindsight ended up being a series of poor decisions. For those of us living in reasonable cost of living areas, we can reach our financial goals without taking that additional risk.
Absolutely. Combining leverage with poor decisions is a great way to go broke. Real estate is an inefficient market that is difficult to diversify. Those inefficiencies mean that those who are good at it can make more than average and those who are bad at it can lose more than average. Certainly you are far more likely to go broke using leverage in direct real estate investing than a simple, plodding approach of dumping a few thousand dollars a month into index funds in your retirement accounts every month.
So many great considerations and pieces of information in this article, even for someone like me who is semi-retired and qualifies as a real estate professional (14 doors down from 23 when I retired), and already invests in real estate through a self-directed 401K. First comment is on the phrase: “for some crazy reason you saved up a bunch of money for retirement but do not actually want to spend it on retirement.” I’m 62 and retired from full time work 7 years ago, so am well-along in exploring retirement. My motivations have gone from “socking as much away as possible so I can to be sure I have enough to retire on” to realizing that I have plenty of savings, a generous pension I don’t fully spend, and a frugal mindset that likely won’t ever change. Also, as you get older you consider the years after you’re gone, which is the inheritance of the family (don’t get me started on the SECURE Act’s destruction of the stretch IRA). So I think those earlier in their career should realize that what you think now may not be what you think later about spending money. Yes I enjoy traveling and still aspire to the dream retirement home, but the primary aim now is how my spouse’s, kids’ and grandkids’ futures are positioned with the financial legacy I leave. And a second “crazy” reason not to spend your retirement savings is the case of RMDs from tax-deferred investments, they can be used for charitable donations which avoids significant taxation under current tax law.
Second comment is a question: “If you’re younger than 59 1/2, and a super-saver, how does the Roth IRA Conversion alternative meet the aim of this article which is to invest in real estate?” I suppose you could do a self-directed Roth IRA and pay the UBIT to keep the majority of the investment tax-protected, but this seems like an isolated case and might be in the onerous work-around category. I may be missing the point of the Super-Saver paragraph in using Roth conversions to invest in real estate.
Thirdly, thanks for bringing up the alternatives of home equity loans/LOCs and 401K loans for real estate investing capital. These are great alternatives, especially the home equity borrowing because repayment terms can be quite long giving you more time to make the long term real estate investment and eventually cash out with a low monthly cost in the interim. I did have a question on the money being “fungible”, though. I think of funding in retirement accounts as being somewhat restricted from swapping with taxable funding methods. What exactly is the fungibility you are addressing?
WCI – Thank you for the post.
Money Jail?? Really?
At some point in life, you just need to be happy and count your blessings. You can’t have it both ways.
I think the infatuation with real estate is quite funny to read on this blog. Don’t waste time buying stocks, index funds are the way to go! But spend hours, days, weeks, months, years studying real estate, evaluating/managing properties, etc. To each his own, just funny. Like a previous poster said, if you want to do real estate, it’s a whole quicker, cheaper and easier than medical school.
I agree that the people who buy a 10 minute portfolio of index funds are not the same people trying to qualify for REPS! The vast majority of my readers/doctors (95%?) are going to go down the “see patients and dump money in index funds” route. Perhaps 4.5% will go down the real estate route. And maybe 0.5% will become entrepreneurs. All reasonable routes to wealth, but you need to pick the right one for you.
https://www.whitecoatinvestor.com/three-pathways-to-wealth/
As far as the stocks vs real estate, I think it makes a lot more sense if you’re going to pour a ton of extra time and effort into your portfolio to do so on the real estate side. It is far less efficient and you have many more opportunities to add (and subtract) value with your efforts. I think the data is pretty clear that’s a waste of effort on the stock side. Maybe it is on the real estate side too, but I’ve never seen it be carefully and fairly evaluated and compared to a REIT index fund.
How could you tell a practicing doctor that it’s reasonable to sell diversified, tax protected index funds for real estate when they don’t even have enough cash to fund their investment without raiding their retirement account. Someone in this situation needs to boost their savings, not increase leverage and decrease diversification.
Amen!
Totally agree!
Totally agree! It’s so easy to amass large amounts of money in taxable accounts and 401k’s.
Jim, I’m glad you had this point / counterpoint about this topic. I’m an active real estate investor and use a lot of Kenji’s teachings about how to do that.
I think you’re spot on that draining retirement funds is all about risk tolerance, taxes, and investment horizon.
As a full-time, employed surgeon, I wrestled with the decision about raiding my own 401k with the CARES act provisions. I do believe that with enough effort, I can beat the S&P 500 returns over time with active real estate investing.
But I decided to do it all with taxable money. I’m not going for REPS for the time being, so the withdrawal cost was a bit too big to swallow without that tax shelter.
My retirement funds will stay whole and happily compounding in the background as a hedge against the (smal) possibility of my real estate ventures going down the tubes.
If you had the cash to do the deal anyway, why would you even consider using funds in a tax deferred account?
I can think of two reasons to preferentially use tax deferred money, for the specialized case that it is self-directed 401K funds and you are investing in real estate that you don’t personally manage or profit from (rather your retirement account invests and profits): 1. Whatever you make is not taxed until you take retirement distributions so you have many years for the earnings to compound before taxes are paid. 2. My reasoning for crowd funding investment with SD401K funding was to add some higher risk/reward assets to the portfolio mix in a tax-preferential way. I figured if it loses some money I would have had to eventually pay tax on it anyway. This is true with taxable funds, too, and at least there you don’t lose the compounding potential. In my case I didn’t want to risk Roth funds which are the most precious to preserve for compounding and I didn’t have sufficient taxable funds. After-tax cash investments require payment of taxes in year they generate income and/or when the investment is sold (capital gains). So what’s best kind of depends on whether you expect to make money – use tax-deferred or Roth and you can avoid or defer a lot of tax on the gain, or think you could lose money where you get the best tax write-offs with taxable funds. Its never simple and crystal balls are not clear, and your time horizon is an additional factor. At the end of the day I think you go with your gut and learn something in the process.
Can’t believe that nobody has pointed out yet that “defense wins championships”–let’s stop using it as a pejorative. WCI’s raison d’etre is to get doctors to stop scoring own-goals and fire expensive financial advisors and invest with lower cost alternatives that deliver almost the same result. If you’re Buffet with stocks or Mahomes with a cannon for an arm, go ahead and launch it in the end zone but most are not that lucky. If real estate investing were a slam dunk then everyone would do it (and the market would quickly achieve some equilibrium anyway), but it carries risk. Some people need to play the game like they have to hit a home run, and fly first class on every vacation in retirement. Some just don’t want to be working when they’re 75 because they have no choice. Sorry for all the mixed sports metaphors.