How much shall I put into solo 401K?

[Anonymous]

Here is my financial profile:
Single mid 40s finance and RE professional
annual income 350K which includes small salaried income and returns from rentals
Equity in income producing RE $3.5mm
Cash $185K (in treasury bonds, at 8% and 3%)
401k and stock options $$25K (didn't begin pension savings till age 40 as I was focused on RE as main retirement vehicle)

I plan to work for at least 20 more years making about same relative inflation each year.

I know my solo 401k is very low relative my NW, but given the meager stock market returns over the last year I wonder if I should continue keeping my cash in bonds or make the largest possible solo 401k contribution (which I think is around 50K for my owner entities structure)? If latter, how much and what I would invest it? My Schwab solo 401k was invested in S&P tracking ETF since June and it's minus 7% now.

Thanks for suggestions!

[Anonymous]

Max it out. You already have a lot of exposure to real estate.

[Anonymous]

Anonymous wrote:Max it out. You already have a lot of exposure to real estate.

But what instrument do I invest it when it's in my solo 401k? Is there a guaranteed cash-like 5% bond ETF or similar? I am concerned about investing it into S&P tracking ETF, it doesn't look like deferred taxation benefits from shielding some of the business RE income in solo 401k outweigh poor returns at this time.

Honestly, I just wanted to prepay the remaining mortgage on one of the homes I own in 6 years when my 2% mortgage rate will hike to 5%, or just getting another investment property as I always select only those at min 7% return. It's below stock market but guaranteed, I never had a nerve watching hundreds of thousands evaporate on brokerage accounts

[Anonymous]

I'm making money in my Vanguard 2040 fund, so that's where I've put mine. I assume you understand the max 25% of your W2 wage limit with the solo 401K?

[Anonymous]

This is a complicated question, and we can’t really answer it did you. I would get Turbo Tax or some such and play around with different scenarios, with both regard to your current tax situation and retirement. If you’re going to have a lot of yearly income from your real estate in retirement, your tax bracket may be high enough that the tax deduction you get now may not be worth getting hit with taxes on big RMDs in retirement. Ideally, you’d have only as much income from RMDs as you actually need to live on.

You can manage non-qualified investments so that they produce little taxable income, so the question is whether you will be in a lower tax bracket in retirement when you realize the “income” from a qualified fund, and whether you’ll need the income in retirement, or whether you’d be better off paying the tax now and letting the money continue to appreciate in retirement without RMDs.

Same issue with paying off the mortgages — you’ll need to run the actual numbers and see how that affects your net taxable income over time, now and in retirement.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Max it out. You already have a lot of exposure to real estate.

But what instrument do I invest it when it's in my solo 401k? Is there a guaranteed cash-like 5% bond ETF or similar? I am concerned about investing it into S&P tracking ETF, it doesn't look like deferred taxation benefits from shielding some of the business RE income in solo 401k outweigh poor returns at this time.

Honestly, I just wanted to prepay the remaining mortgage on one of the homes I own in 6 years when my 2% mortgage rate will hike to 5%, or just getting another investment property as I always select only those at min 7% return. It's below stock market but guaranteed, I never had a nerve watching hundreds of thousands evaporate on brokerage accounts

The time to buy is when they market is down, and right now, the stock market is down and the real estate market is still near its peak. If estate makes you comfortable, buy real estate. However, I have relatives like you who only buy real estate and some have done very well because they got lucky and bought in hot markets and saw lots of appreciation, and some died broke because their real estate value stagnated. Real estate is not risk free (it’s just looked that way if you lived in DC over the past ten years) and the carrying costs of maintaining property at high level are considerable. Do you really want to put all your eggs in one basket? I do own some real estate investments via REITS, but there’s no way I would invest even the majority of my assets in one sector.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Max it out. You already have a lot of exposure to real estate.

But what instrument do I invest it when it's in my solo 401k? Is there a guaranteed cash-like 5% bond ETF or similar? I am concerned about investing it into S&P tracking ETF, it doesn't look like deferred taxation benefits from shielding some of the business RE income in solo 401k outweigh poor returns at this time.

Honestly, I just wanted to prepay the remaining mortgage on one of the homes I own in 6 years when my 2% mortgage rate will hike to 5%, or just getting another investment property as I always select only those at min 7% return. It's below stock market but guaranteed, I never had a nerve watching hundreds of thousands evaporate on brokerage accounts

The time to buy is when they market is down, and right now, the stock market is down and the real estate market is still near its peak. If estate makes you comfortable, buy real estate. However, I have relatives like you who only buy real estate and some have done very well because they got lucky and bought in hot markets and saw lots of appreciation, and some died broke because their real estate value stagnated. Real estate is not risk free (it’s just looked that way if you lived in DC over the past ten years) and the carrying costs of maintaining property at high level are considerable. Do you really want to put all your eggs in one basket? I do own some real estate investments via REITS, but there’s no way I would invest even the majority of my assets in one sector.

The building next door to mine is over 100 years old, the 3rd generation of owners are still living off this income. It’s central DC. REITs are managed by other people who don’t have your best interests in mind, and you are remotely not familiar with carrying costs of the RE they hold. It’s totally different from self managed high quality RE. Carrying costs are not as high and you can always exchange or expand using 1031 to a larger newer project

[Anonymous]

Anonymous wrote:I'm making money in my Vanguard 2040 fund, so that's where I've put mine. I assume you understand the max 25% of your W2 wage limit with the solo 401K?

Yes I do. Do you also realize the employer /your single owner business entity can match that 25% ?

[Anonymous]

Anonymous wrote:This is a complicated question, and we can’t really answer it did you. I would get Turbo Tax or some such and play around with different scenarios, with both regard to your current tax situation and retirement. If you’re going to have a lot of yearly income from your real estate in retirement, your tax bracket may be high enough that the tax deduction you get now may not be worth getting hit with taxes on big RMDs in retirement. Ideally, you’d have only as much income from RMDs as you actually need to live on.

You can manage non-qualified investments so that they produce little taxable income, so the question is whether you will be in a lower tax bracket in retirement when you realize the “income” from a qualified fund, and whether you’ll need the income in retirement, or whether you’d be better off paying the tax now and letting the money continue to appreciate in retirement without RMDs.

Same issue with paying off the mortgages — you’ll need to run the actual numbers and see how that affects your net taxable income over time, now and in retirement.

Thank you, this is my thinking as well. I just can’t figure out how to run this integrated analysis of all components. Do financial advisers offer this (without offering their products)?
I am concerned that at some point in older age I won’t be able to manage my RE as efficiently. What if I get sick, mentally disabled etc? There is only one heir who is mentally handicapped and won’t be able to help me in older age.

[Anonymous]

Anonymous wrote:

Anonymous wrote:This is a complicated question, and we can’t really answer it did you. I would get Turbo Tax or some such and play around with different scenarios, with both regard to your current tax situation and retirement. If you’re going to have a lot of yearly income from your real estate in retirement, your tax bracket may be high enough that the tax deduction you get now may not be worth getting hit with taxes on big RMDs in retirement. Ideally, you’d have only as much income from RMDs as you actually need to live on.

You can manage non-qualified investments so that they produce little taxable income, so the question is whether you will be in a lower tax bracket in retirement when you realize the “income” from a qualified fund, and whether you’ll need the income in retirement, or whether you’d be better off paying the tax now and letting the money continue to appreciate in retirement without RMDs.

Same issue with paying off the mortgages — you’ll need to run the actual numbers and see how that affects your net taxable income over time, now and in retirement.

Thank you, this is my thinking as well. I just can’t figure out how to run this integrated analysis of all components. Do financial advisers offer this (without offering their products)?
I am concerned that at some point in older age I won’t be able to manage my RE as efficiently. What if I get sick, mentally disabled etc? There is only one heir who is mentally handicapped and won’t be able to help me in older age.

Pardon, didn’t finish the sentence - and because of succession issues I wanted to start solo 401 to have that “fallback”

[Anonymous]

Anonymous wrote:I'm making money in my Vanguard 2040 fund, so that's where I've put mine. I assume you understand the max 25% of your W2 wage limit with the solo 401K?

It shows me -17% YTD, how is it making money for you ?

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'm making money in my Vanguard 2040 fund, so that's where I've put mine. I assume you understand the max 25% of your W2 wage limit with the solo 401K?

Yes I do. Do you also realize the employer /your single owner business entity can match that 25% ?

+1 We contribute a combined $120K into our 401k solo from our self employment income, but we are also 50+ so we get the extra catchup. But yes, you can contribute both your employer and employee's portion into your 401k. Employer's portion is a % of your self employment income; employee's portion is fixed.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I'm making money in my Vanguard 2040 fund, so that's where I've put mine. I assume you understand the max 25% of your W2 wage limit with the solo 401K?

Yes I do. Do you also realize the employer /your single owner business entity can match that 25% ?

+1 We contribute a combined $120K into our 401k solo from our self employment income, but we are also 50+ so we get the extra catchup. But yes, you can contribute both your employer and employee's portion into your 401k. Employer's portion is a % of your self employment income; employee's portion is fixed.

OP here, yes I know that can contribute 50-60k this year combined my abs employer contribution. The question is whether it’s worth it (basically contribute, keep it in cash on 401k, or some other instrument) vs keeping after tax in gov bonds to prepay mortgage or reuse in business in 6-7 years

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Max it out. You already have a lot of exposure to real estate.

But what instrument do I invest it when it's in my solo 401k? Is there a guaranteed cash-like 5% bond ETF or similar? I am concerned about investing it into S&P tracking ETF, it doesn't look like deferred taxation benefits from shielding some of the business RE income in solo 401k outweigh poor returns at this time.

Honestly, I just wanted to prepay the remaining mortgage on one of the homes I own in 6 years when my 2% mortgage rate will hike to 5%, or just getting another investment property as I always select only those at min 7% return. It's below stock market but guaranteed, I never had a nerve watching hundreds of thousands evaporate on brokerage accounts

The time to buy is when they market is down, and right now, the stock market is down and the real estate market is still near its peak. If estate makes you comfortable, buy real estate. However, I have relatives like you who only buy real estate and some have done very well because they got lucky and bought in hot markets and saw lots of appreciation, and some died broke because their real estate value stagnated. Real estate is not risk free (it’s just looked that way if you lived in DC over the past ten years) and the carrying costs of maintaining property at high level are considerable. Do you really want to put all your eggs in one basket? I do own some real estate investments via REITS, but there’s no way I would invest even the majority of my assets in one sector.

The building next door to mine is over 100 years old, the 3rd generation of owners are still living off this income. It’s central DC. REITs are managed by other people who don’t have your best interests in mind, and you are remotely not familiar with carrying costs of the RE they hold. It’s totally different from self managed high quality RE. Carrying costs are not as high and you can always exchange or expand using 1031 to a larger newer project

Sure they have income, but did they maximize their investment? I inherited property that was completely paid for, but between property taxes, insurance, termite bond, and local landlord licensing fees, the ROI wasn't that great (and this was in a hot California coastal market). That's if you manage the property yourself, which means you have to deal with getting the HVAC or busted plumbing repaired in the middle of the night. Add property management fees if you don't want to do that. Maintaining property at a high level is also not cheap -- renters are *hard* on houses & it needs constant investment I sold at the top of the market and, even with the recent downturn in the stock market, I've done much better with my investments and I don't have to deal with tenants.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'm making money in my Vanguard 2040 fund, so that's where I've put mine. I assume you understand the max 25% of your W2 wage limit with the solo 401K?

It shows me -17% YTD, how is it making money for you ?

DP. I'm down 6% YTD, but even after that I'm still up about 25% since January 2020. You have to be willing to ride out the ups and downs.

FWIW, the REITS that I'm invested in have returned 28% over that period.