32 yrs. IRA's or Real Estate Investing for ER? Thx for help!

[okie]

I am new to the forum. Personal finance is one of my favorite subjects. I have a good feeling about early retirement but I'm not sure about one thing. I have searched the forums history but can't find an answer.

Our financial status.

$120k-150k- gross annual income. Depends upon year end distributions. $120k at min. I have some ownership in my company. Stock valued between $70k to $90k. So when i retire ill have to cash out. Also, income will go up over time.

$55k mortgage payoff on a $315 k house. We have a $289 monthly payment-30 yr mortgage. We are going to knock this mortgage out ASAP. Tired of it hanging over my head.

No debt other than $55k mortgage. We pay cash for everything.

We have one rental property $85,000 invested, 100% paid for. House valued at $105k or so. We plan to keep it. Net return is about 10% on average. 16% gross return.

We have $45-50k operating cash on hand. Emergency fund mainly.

We just started investing in our personal IRA's (no 401k's available at wrk). but aren't sure if this is somewhere we should dump our money if we plan to retire early? We have $12 k in one acct and $9k in another. So not a lot invested here as of now....

I plan to retire somewhere in the next 7-12 yrs. And when I say retire I do mean part time, part time contract work, do whatever I want to do, or possibly do nothing but hobbies etc.

I love real estate. I can see it. It brings an excellent ROI. I would love to retire early with more paid for rental properties. Im handy so that would give me something to do with ER. So my question is: Should I continue dumping $11k every year into our IRAS at the same time save up for more rentals to purchase? Should we drop the IRAS altogether and concentrate on other mutual funds + rental properties? Just rental properties alone? I know they say not to have all eggs in one basket. But with rental properties even if the market crashed over and over again wouldn't rental properties bring higher consistent returns? They will be paid for, buying with cash only so not much risk in my opinion?

Or am I over thinking this whole thing? Is kissing 11k goodbye every year not that big of a deal in the big picture? I feel it's slowing me down for something a lot closer than 59 1/2!!

Our inheritances will most likely be very substantial (upwards of 2-3mill is my best guess) but we are planning for ourselves early and not going to be dependent on the inheritances and hope for ER with our own personal finances. Everything else will be icing on the cake.

BTW I have a wife and 2 kids. I am 32 and my DW is 34. She does not work but will when the kids are a bit older. She will have the ability to make an excellent income.

Thanks!

 

[panacea]

IRAs are definitely a good idea. You could do deductible IRAs, which isn't a bad idea since you're in the 25% tax bracket but the Roth probably make more sense from an early retirement standpoint b/c you can withdraw your contributions at any time without tax or penalty. So you could use the contributions later to live on or buy property. If you miss the contribution for the year you can't go back and change your mind. But if you don't need the funds, you can leave the money in the account to grow tax-free. Owning some low-cost, diversified mutual funds in a tax-sheltered vehicle will provide some investment diversification as well as tax diversification in your portfolio to complement your real estate.

 

[okie]

Thanks for the advice. Our IRAS are currently traditional. So you are saying the Roth I could withdrawal the principle tax and penalty free? As long as I leave the earnings in the fund? I suppose if that is the case can I roll our traditional's into Roths?

 

[panacea]

That's correct- just have to leave the earnings alone. Any withdrawals are assumed to be principal first. On converting traditional IRAs to Roths, the rules are actually a bit different. Can't remember off the top of my head, but there are additional restrictions on withdrawing from converted Roth IRAs as compared to contributory Roth IRAs. Also you'd have to pay tax on the Traditional IRA earnings at your marginal tax rate to convert them to Roths so maybe not ideal.

 

[Animorph]

Thanks for the advice. Our IRAS are currently traditional. So you are saying the Roth I could withdrawal the principle tax and penalty free? As long as I leave the earnings in the fund? I suppose if that is the case can I roll our traditional's into Roths?

A rollover is not a contribution. No penalty free withdrawal in that case.

 

[okie]

I just found out that my company is switching some things around and will offer a 401k. But will not match at all. So I can dump 17.5k all by myself. With my current financial position would it be wise to invest in the 401k and continue funding our two Tira's? Ill have the ability to manage the 401k myself. Limited options but still manageable.

My initial thought was yes I for sure should max out the 401. But with the likelihood of ER and the thought of the govt raising taxes later on I thought it might not be the best idea.

For some reason I cannot process the different scenarios.

Advice and thoughts greatly appreciated.

 

[Animorph]

If your current tax rate is likely to be higher than after you retire then funding the 401k is usually a good idea. If you have a 401k at work it seems unlikely you could make a deductible tIRA contribution. However you could make a Roth IRA contribution if your AGI is low enough. If you ER and will have a very low taxable income for a few years you may be able to Roth convert your tIRA/401k at a very low tax rate.

If you plan to retire before 59.5 then be sure you have enough taxable account value to carry you through until you can withdraw from the 401k/tIRA without a penalty.

 

[Senator]

Do the 401K, it will lower your salary and provide an opportunity for compound growth.

Get a Home Equity line. Scour for deals. When you get one, but it cash with the HEQ.

 

[LongPrime]

For what you want to do, I'd stop tIRA/Roth/401k. Stick to what you know, which appears to be investment housing.
If you want a second method to get from here to there (savings/investment), a retirement plan could be it.

GL

 

[FIGuy]

Hi Okie,

First off, check out "biggerpockets.com" if you haven't already. Great place to learn more about RE. I don't know your situation of course, but many folks overestimate their long term return in real estate investment.

I recommend taking both approaches. RE investment (in an LLC) is our primary ER approach, but we do fully fund 401k and Roth IRAs in case I screw up the real estate approach. A global index fund will be around a long time. I can't say my RE biz will be and we don't use leverage there either so it is conservative. Given your numbers and time frame, RE is probably going to be your best bet unless you're willing to save more than 50% of net income to invest in the stock market. However, I'd try to get both legs to cover your financial needs. You seem to share a similar mindset regarding debt as I do and I find this "hedged bet" approach makes me happiest. To some extent, having a backup makes you a better investor in my opinion.

I also share the "work part time at a job I love" approach too. I think for folks like us, it's pretty reasonable to get just FI enough to cover the basics if working part-time is really the goal and if you can keep the same high hourly wage so you're not working 5x as much flipping burgers or something. You'd still be worlds ahead of the average person and could always go back to full time to grow the passive income if desired.

 

[okie]

Sorry took so long to reply. Demanding kiddos the last few days. I appreciate all of the recommendations and advice. So thank you.

I am uncertain with how much income I'll have in ER so it's hard for me to make a decision btwn 401k or not. I'm not certain that my tax bracket would be any different for conversion purposes either. So Im not positive that the 401 will be my best approach. My gut is telling me to invest in roths for both myself and DW, real estate and some ordinary funds. The roth because I can withdrawal early if I have to. Real estate because I believe this will be my primary source of ER income. I might try some safe funds that are fairly predictable. If all else fails I'll keep consulting or something to reach a greater level of FI. If I can save and reinvest consistently over the next decade hopefully things will look bright. We want to retire with a lot of options. I don't want to scrape by with a low retirement income.

 

[unno2002]

[FONT=&quot]Okie-[/FONT]
[FONT=&quot]
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[FONT=&quot]With the right custodian, your IRA can buy rental real estate, just like it can buy a share of stock.[/FONT]

 

[Sirka]

I just found out that my company is switching some things around and will offer a 401k. But will not match at all.

Advice and thoughts greatly appreciated.

I would put some money into a 401k (pretax), when available & I would put the rest of the 'investment' money into Roth IRA (after tax). Combine that with your investment properties and your are on your way!

Next question should be: which funds?

 

[Onward]

IRA ... or PIA?

IRA.

 

[okie]

[FONT=&quot]Okie-[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]With the right custodian, your IRA can buy rental real estate, just like it can buy a share of stock.[/FONT]

Good to know. I was unaware this was possible.

 

[okie]

I would put some money into a 401k (pretax), when available & I would put the rest of the 'investment' money into Roth IRA (after tax). Combine that with your investment properties and your are on your way!



Next question should be: which funds?

I like the idea of the pre tax 401k however, I feel like my retirement income will be equal to or greater than my current income. Part of me feeling like this is not only what I know I can save/invest over the next decade but also taking into consideration my inheritance. I am not counting on or depending upon it whatsoever I am only predicting the income from that. Most of it is commercial real estate with 100% equity. My folks have been very frugal. So I honestly feel like I might be at my low now. It's hard for me to absorb that reality but I need to be considering it. Inheritances aside I feel that my current income will most likely be equal with my retirement income. Or at least be in the same tax bracket plus or minus a little.

As far as funds, I don't know where to start really. I haven't paid much attention to stocks. Some good growth stock mutual funds I suppose with a long track record.

 

[okie]

IRA ... or PIA?



IRA.

What is a Pia?

 

[omni550]

What is a Pia?

"Pain in the *ss" would be my guess.

omni

 

[okie]

Ah gotcha. I don't consider SS part of my retirement plan.

 

[rb35]

I'm 32 also and max our my 401k, do a back door Roth and invest in real estate.

Real estate is great for deferring income taxes because of the depreciation, not to mention it's tangible and provides a nice cash flow. The 401k and IRAs are great for deferring taxes on whatever investment you choose to put in them. They're also excellent for holding investments for which the tax accounting can be tedious (e.g. certain types of bonds).

Broadly speaking, I use taxable money for stocks and real estate; I use my 401k and IRA for less tax efficient investments like bonds, REITs and preferred stock.

When I was around 20 and in a lower tax bracket, I also wondered if I was doing the right thing maxing out my 401k. Looking back, I'm very glad I did. I now have over 600k in tax advantaged accounts and having it has allowed me to take advantage of some unique investment opportunities that I would not have put taxable dollars in -- the accounting would have been a nightmare.

It's also nice to know my bets are hedged, not only from the different types of investment vehicles (stocks, bonds, real estate) but from a tax perspective (Roth and traditional).

Since you're limited in how much you can put in your 401k and IRA, I would max it out whenever you can. Taxable dollars are much easier to accumulate.

Hope this helps!

 

[Senator]

RE can be very rewarding, but make sure you know what you are doing. Know how to calculate returns. Get a RE license so you can get a built-in discount.

 

[38Chevy454]

If you can handle the hassles and tenant issues of rental properties, then have fun. I used to have some and decided that IRA's and other accounts are much less trouble. A rental property is not free money, it is a part-time job. The rate at which your PT job is paid depends on the rental and the amount of time you have to put in. I don;t like that most staes the tenants have more rights than landlord and you have no real recourse. Good tenants worth it, bad tenants spoil it for everyone else.

I would max out your pre-tax, to build up some IRA type savings and save the highest tax rate on that money; your tax rate in retirement is most likely less than current. Any left over put into real estate if you want.