As promised, after taking Than Merrill’s real estate investor 3-day seminar, I would come back and provide an update on our progress. I didn’t want to commit in joining their ‘program’, but we’ve happily shared some concepts we were exposed to like banks and the highest and best use of time. However, the last few weeks, I’ve been on an active search for investment property. With Bernadette being in grad school, I’ve had to locate additional sources of funds after scrounging up all the coins between the couch cushions.
What I’ve decided to do is use my 401(k) from my previous employer. But I’m not going to take a loan from it or take a withdrawal penalty. When I’ve found the right rental property, I’ll liquidate the funds by transferring it to a trust custodian into a self-directed IRA. It’s still only used for retirement purposes, and there are MANY restrictions and prohibited transactions, so tread carefully. Basically, you can use a retirement account to invest in assets other than the limited stocks, bonds, mutual funds, etc. of your employer’s 401(k), hence the term self-directed. These assets can include real estate, of course, financial notes, precious metals, etc. The rules are strict where I must keep these investments separate and not mix personal use with retirement account-owned properties. Every expense must come from the IRA account!
However, my biggest regret was funding all my 401(k) as a traditional vs. Roth throughout my first 9 years of working. A main difference between the two is that the traditional is funded pre-tax and then taxes are assessed after retirement when you expect to be in a lower tax bracket, where the Roth is funded after-tax but you don’t have to pay taxes on the withdrawals after retirement, thus any capital gains and rental income going into the account can grow ‘tax-free’. The notion of being in a higher tax bracket after retirement was alien to me since I always thought that I would be working comfortably until retirement, but I realized for the opportunity to be financially free, I’ll always have income from investments and other gaining assets, but the tax deductions available now won’t be there at that future age.
So I’m biting the bullet and converting my traditional 401(k) to a Roth Self-directed IRA. It hurts to take the hit and pay the taxes now for the entire amount I convert; ultimately seeing my retirement account dwindle, but in the long run it’s worth it while she’s in school, we have mortgage interest to deduct, and we’ll be in an overall lower combined tax bracket than any other time in our future (ideally).
Albeit, real estate is definitely a risky investment but so can trusting fund managers and the stock market. There were plenty of retirees who got screwed from the recent market collapse and who’s to say it won’t happen again multiple times. Do you think I’m making the right decision? Have you thought about your retirement? What advice would you give me?