Is it sensible to redirect retirement contributions from 401(k) towards becoming a landlord?
"Here are the issues, as I see them - It's not that I don't trust banks, but I just feel like throwing all   of our money into intangible investments is unwise. Banks have virtually nothing to do with this. And intangible assets has a different meaning than you assume. You don't have to like the market, but try to understand it, and dislike it for a good reason. (Which I won't offer here). Do your 401(k) accounts offer company match? When people start with ""we'd like to reduce our deposits"" that's the first thing we need to know. Last - you plan to gain ""a few hundred dollars a month."" I bet it's closer to zero or a loss. I'll return to edit, we have recent posts here that reviewed the expenses to consider, and I'd bet that if you review the numbers, you've ignored some of them. ""A few hundred"" - say it's $300. Or $4000/yr. It would take far less work and risk to simply save $100K in your retirement accounts to produce this sum each year.  The investment may very well be excellent. I'm just offering the flip side, things you might have missed.   Edit - please read the discussion at How much more than my mortgage should I charge for rent? The answers offer a good look at the list of expenses you need to consider. In my opinion, this is one of the most important things. I've seen too many new RE investors ""forget"" about so many expenses, a projected monthly income reverts to annual losses." As a general rule, diversification means carrying sufficient amounts in cash equivalents, stocks, bonds, and real estate.   An emergency fund should have six months income (conservative) or expenses (less conservative) in some kind of cash equivalent (like a savings account).  As you approach retirement, that number should increase.  At retirement, it should be something like five years of expenses.  At that time, it is no longer an emergency fund, it's your everyday expenses.  You can use a pension or social security to offset your effective monthly expenses for the purpose of that fund.  You should five years net expenses after income in cash equivalents after retirement.   The normal diversification ratio for stocks, bonds, and real estate is something like 60% stocks, 20% bonds, and 20% real estate.  You can count the equity in your house as part of the real estate share.  For most people, the house will be sufficient diversification into real estate.   That said, you should not buy a second home as an investment.  Buy the second home if you can afford it and if it makes you happy.  Then consider if you want to keep your first home as an investment or just sell it now.   Look at your overall ownership to determine if you are overweighted into real estate.  Your primary house is not an investment, but it is an ownership.  If 90% of your net worth is real estate, then you are probably underinvested in securities like stocks and bonds.  50% should probably be an upper bound, and 20% real estate would be more diversified.   If your 401k has an employer match, you should almost certainly put enough in it to get the full match.   I prefer a ratio of 70-75% stocks to 25-30% bonds at all ages.  This matches the overall market diversification.  Rebalance to stay in that range regularly, possibly by investing in the underweight security.  Adding real estate to that, my preference would be for real estate to be roughly a quarter of the value of securities.  So around 60% stocks, 20% bonds, and 20% real estate.  A 50% share for real estate is more aggressive but can work.   Along with a house or rental properties, another option for increasing the real estate share is a Real Estate Investment Trust (REIT).  These are essentially a mutual fund for real estate.  This takes you out of the business of actively managing properties.   If you really want to manage rentals, make sure that you list all the expenses.  These include:   Also be careful that you are able to handle it if things change.  Perhaps today there is a tremendous shortage of rental properties and the vacancy rate is close to zero.  What happens in a few years when new construction provides more slack?   Some kinds of maintenance can't be done with tenants.  Also, some kinds of maintenance will scare away new tenants.  So just as you are paying out a large amount of money, you also aren't getting rent.  You need to be able to handle the loss of income and the large expense at the same time.   Don't forget the sales value of your current house.  Perhaps you bought when houses were cheaper.  Maybe you'd be better off taking the current equity that you have in that house and putting it into your new house's mortgage.  Yes, the old mortgage payment may be lower than the rent you could get, but the rent over the next thirty years might be less than what you could get for the house if you sold it.  Are you better off with minimal equity in two houses or good equity with one house?   I would feel better about this purchase if you were saying that you were doing this in addition to your 401k.  Doing this instead of your 401k seems sketchy to me.  What will you do if there is another housing crash?  With a little bad luck, you could end up underwater on two mortgages and unable to make payments.  Or perhaps not underwater on the current house, but not getting much back on a sale either.   All that said, maybe it's a good deal.  You have more information about it than we do.  Just...be careful. "With a healthy income its quite possible to contribute too much into 401Ks/IRAs.  For example, if your retired today and had 3 million or so, how much more would you need?  Would an extra million materially change your life?  Would it make you happier if you invested that extra in some rental properties or perhaps a business like a sandwich or ice cream shop where you have more direct control? This kind of discussion is possible as you indicate that you have taken care of your life financially.  It seems at odds with the negative press describing the woefully condition of the standard person's finances.  These articles ignore a very simple fact:  its because of bad behavior.  You, on the contrary, have behaved well and are in the process of reaping rewards.  This is where I feel your ""mental gymnastics"" originates.   Looking to engage in the rental market is no different then buying a franchise.  You are opening a business of your own.  You'll have to educate yourself and are likely to make a few mistakes that will cause you to write checks to solve.  Your goal is to minimize those mistakes.  After all, what do you know about the rental home business?  I am guessing not much.  Educate yourself.  Read and spend some money on taking knowledgeable people out for coffee.   In the end you should understand that although a poor decision may cost you money you cannot really make a bad decision.  Lets say you do buy a rental property, things go south, you sell for a loss, etc....  In the end the ""butchers bill"" is 50K or so.  Will that materially change your life?  Probably not.  The worst case is perhaps you have to work a year or two beyond the anticipated retirement age to make up that money.  No big deal." This is going to seem pretty far off the beaten path, but I hope when you finish reading it you'll see the point... Suppose someone offered you a part time job: Walk their dog once per day for at least 20 minutes, and once per week pick up the dog poo from their lawn. Your compensation is $300/month. Now suppose instead you are given two choices for a job: Your preference probably has more to do with your personality and interests than the finances involved.
"So you are paying taxes on your contributions regardless, the timing   is just different. I am failing to see why would a person get an IRA, instead of just   putting the same amount of money into a mutual fund (like Vanguard) or   something like that. What am I missing? You are failing to consider the time value of money. Getting $1 now is more valuable to you than a promise to get $1 in a year, even though the nominal amount is the same. With a certain amount of principal now, you can invest it and it will (likely) grow into a bigger amount of money (principal + earnings) at a later time, and we can consider the two to have approximately equivalent value (the principal now has the same value as the principal + earnings later). With pre-tax money in Traditional IRA, the principal + earnings are taxed once at the time of withdrawal. Assuming the same flat rate of tax at contribution and withdrawal, this is equivalent to Roth IRA, where the principal is taxed at the time of contribution, because the principal now has the same value as the principal + earnings later, so the same rate of tax on the two have the same value of tax, even though when you look at nominal amounts, it might seem you are paying a lot less tax with Roth IRA (since the earnings are never ""taxed""). With actual numbers, if we take a $1000 pre-tax contribution to Traditional IRA, it grows at 5% for 10 years, and a 25% flat rate tax, we are left with $1000 * 1.05^10 * 0.75 = $1221.67. With the same $1000 pre-tax contribution (so after 25% tax it's a $750 after-tax contribution) to a Roth IRA, growing at the same 5% for 10 years, and no tax at withdrawal, we are left with $1000 * 0.75 * 1.05^10 = $1221.67. You can see they are equivalent even though the nominal amount of tax is different (the lower amount of tax paid now is equivalent to the bigger amount of tax later). With a taxable investment which you will not buy and sell until you take it out, you contribute with after-tax money, and when you take it out, the ""earnings"" portion is subject to capital-gains tax. But remember that the principal + earnings later is equivalent to the principal now, which is already all taxed once, and if we tax the ""earnings"" portion later, that is effectively taxing a portion of the money again. Another way to look at it is the contribution is just like the Roth IRA, but the withdrawal is worse because you have to pay capital-gains tax instead of no tax. You can take the same numbers as for the Roth IRA, $1000 * 0.75 * 1.05^10 = $1221.67, but where the $1221.67 - $750 = $471.67 is ""earnings"" and is taxed again at, say, a 15% capital-gains rate, so you lose another $70.75 in tax and are left with $1150.92. You would need a capital-gains tax rate of 0% to match the advantage of the pre-tax Traditional IRA or Roth IRA. After-tax money in Traditional IRA has a similar problem -- the contribution is after tax, but after it grows into principal + earnings, the ""earnings"" part is taxed again, except it is worse than the capital-gains case because it is taxed as regular income. Like above, you can take the same numbers as for the Roth IRA, $1000 * 0.75 * 1.05^10 = $1221.67, but where the $471.67 ""earnings"" is taxed again at 25%, so you lose another $117.92 in tax and are left with $1103.75. So although the nominal amount of tax paid is the same as for pre-tax money in Traditional IRA, it ends up being a lot worse. (Everything I said above about pre-tax money in Traditional IRA, after-tax money in Traditional IRA, and Roth IRA, also applies to pre-tax money in Traditional 401(k), after-tax money in Traditional 401(k), and Roth 401(k), respectively.) Regarding the question you raise in the title of your question, why someone would get contribute to a Traditional IRA if they already have a 401(k), the answer is, mostly, they wouldn't. First, note that if you merely have a 401(k) account but neither you nor your employer contributes to it during the year, then that doesn't prevent you from deducting Traditional IRA contributions for that year, so basically you can contribute to one or the other; so if you only want to contribute below the IRA contribution limit, and don't need the bigger 401(k) contribution limit, and the IRA's investment options are more attractive to you than your 401(k)'s, then it might make sense for you to contribute to only Traditional IRA. If you or your employer is already contributing to your 401(k) during the year, then you cannot deduct your Traditional IRA contributions unless your income is very low, and if your income is really that low, you are in such a low tax bracket that Roth IRA may be more advantageous for you. If you make a Traditional IRA contribution but cannot deduct it, it is a non-deductible Traditional IRA contribution, i.e. it becomes after-tax money in a Traditional IRA, which as I showed in the section above has much worse tax situation in the long run because its earnings are pre-tax and thus taxed again. However, there is one good use for non-deductible Traditional IRA contributions, and that is as one step in a ""backdoor Roth IRA contribution"". Basically, there is an income limit for being able to make Roth IRA contributions, but there is no income limit for being able to make Traditional IRA contributions or for being able to convert money from Traditional IRA to Roth IRA. So what you can do is make a (non-deductible) Traditional IRA contribution, and then immediately convert it to Roth IRA, and if you did not previously have any pre-tax money in Traditional IRAs, this achieves the same as a regular Roth IRA contribution, with the same tax treatment, but you can do it at any income level." The 401(k) contribution is Federal tax free, when you make the contribution, and most likely State too.  I believe that is true for California, specifically. There was a court case some years ago about people making 401(k) or IRA contributions in New York, avoiding the New York state income tax.  Then they moved to Florida (no income tax), and took the money out.  New York sued, saying they had to pay the New York income tax that had been deferred, but the court said no.  So you should be able to avoid California state income tax, and then later if you were to move to, for example, Texas (no income tax), have no state income tax liability. At the Federal level, you will have different problems.  You won't have the money; it will be held by the 401(k) trustee.  When you try to access the money (cash the account out), you will have to pay the deferred taxes.  Effectively, when you remove the money it becomes income in the year it is removed. You can take the money out at any time, but if you are less than 59 1/2 at the time that you take it, there is a 10% penalty.  The agreement is that the Feds let you defer paying the tax because it is going to finance your retirement, and they will tax it later.  If you take it out before 59 1/2, they figure you are not retired yet, and are breaking your part of the agreement. Of course you can generally leave the money in the 401(k) plan with your old employer and let it grow until you are 59.5, or roll it over into another 401(k) with a new employer (if they let you), or into an IRA.  But if you have returned to your own country, having an account in the U.S. would introduce both investment risk and currency risk. If you are in another country when you want the money, the question would be where your U.S. residence would be.  If you live in California, then go to, say France, your U.S. residence would still be California, and you would still owe California income tax.  If you move from California to Texas and then to France, your U.S. residence would be Texas.   This is pretty vague, as you might have heard in the Rahm Emanual case -- was he a resident of Chicago or Washington, D.C.?  Same problem with Howard Hughes who was born in Texas, but then spent most his life in California, then to Nevada, then to Nicaragua, and the Bahamas.  When he died Texas, California and Nevada all claimed him as a resident, for estate taxes.  The important thing is to be able to make a reasonable case that you are a resident of where ever you want to be -- driver's license, mailing address, living quarters, and so on. "There are two types of 401(k) contributions: ""elective contributions,"" which are the part put in by the employee and ""nonelective contributions,"" which are the part put in by the company.  Elective contributions are summed across all the plans she is contributing to.  So she can contribute $18,000 minus whatever she put in her 403(b). Additionally she can contribute 20% of the net profit of the company (before the elective contributions) as nonelective contributions (these contributions must be designated as such). You will notice that the IRS document says 25%, but that's what you can do if her business is incorporated.  For a sole proprietorship, nonelective contributions  ends up being limited at 20% of profit. Additionally, the sum of these two and her contribution to her 403(b) cannot exceed $53,000. Example: line 31 of her schedule C is $30,000 and she has contributed $10,000 to her 403(b). Maximum contribution to her solo 401(k) is ($18,000 - $10,000) + 0.2 * $30,000 = $14,000 Her total contributions for the year are $10,000 from her 403(b) plus $14,000 in her solo 401(k).  This is less than $53,000 so this limit does not bind.  If she made a ton of 1099 money, her contribution maximum would follow the above until it hit $53,000 and then it would stop there. The IRS describes this in detail in Publication 560, which also has a worksheet for figuring out your maximum explicitly.  It's unpleasant reading and the worksheets are painful, but if you do it right, it will end up being as I just described it.  Using the language of that publication, hers is a ""qualified plan"" of the ""defined contribution"" variety." "Assuming the numbers work out roughly the same (and you can frankly whip up a spreadsheet to prove that out), a defined benefit scheme that pays out an amount equal to an annuitized return from a 401(k) is better.  The reason is not monetary - it is that the same return is being had at less risk. Put another way, if your defined benefit was guaranteed to be $100/month, and your 401(k) had a contribution that eventually gets to a lump sum that, if annuitized for the same life expectancy gave you $100/month, the DB is better because there is less chance that you won't see the money. Or, put even simpler, which is more likely? That New York goes Bankrupt and is relieved of all pension obligations, or, the stock market underperforms expectations.  Neither can be ruled out, but assuming even the same benefit, lower risk is better. Now, the complication in your scenario is that your new job pays better.  As such, it is possible that you might be able to accumulate more savings in your 401(k) than you might in the DB scheme.  Then again, even with the opportunity to do so, there is no guarantee that you will.  As such, even modelling it out really isn't going to dismiss the key variables. As such, can I suggest a different approach?  Which job is going to make you happier now?  Part of that may be money, part of that may be what you are actually doing.  But you should focus on that question. The marginal consideration of retirement is really moot - in theory, an IRA contribution can be made that would equalize your 401(k), negating it from the equation.  Grant you, there is very slightly different tax treatment, and the phaseout limits differ, but at the salary ranges you are looking at, you could, in theory, make decisions that would have the same retirement outcome in any event. The real question is then not, ""What is the effect in 20 years?"" but rather, which makes you happier now?" To answer your question: As far as what's available in addition to your 401(k) at work (most financial types will say to contribute up to the match first), you may qualify for a Roth IRA (qualification is based on income), if not, then you may have to go with a Traditional IRA.  You and your husband can each have one and contribute up to the limit each year.  After that, you could get just a straight up mutual fund, and/or contribute up to limit on your 401(k). My two cents: This may sound counter-intuitive (and I'm sure some folks will disagree), but instead of contributing to your 401(k) now, take whatever that amount is, and use it to pay extra on the car loan.  Also take the extra being paid on the mortgage and pay it on the car loan too.  Once the car loan is paid off, then set aside 15% of your gross income and use that amount to start your retirement investing.   Any additional money beyond this can then go into the mortgage.  Once it's paid off, then you can take the extra you were paying, plus the mortgage and invest that amount into mutual funds. You may want to check out Chris Hogan's Retire Inspired book or podcast as well. You cannot contribute directly to that 401k account if you no longer work at the sponsoring company - you have to be on their payroll.  You can, however, roll the 401k over into an IRA, and contribute to the IRA. Note that in both cases, you are only allowed to contribute from earned income (which includes all the taxable income and wages you get from working or from running your own business). As long as you are employed (and have made more than $5k this year) you should have no problem. I am not certain whether contributing your $5k to a roth IRA would help you achieve your tax goals, someone else here certainly can advise. I would not recommend borrowing your 401(k) money to buy a house for two reasons: When you borrow money from your 401(k), it is no longer invested. Yes, you pay yourself interest, but you miss out on the investment gains for the life of the loan.  If you leave your job, the loan is due in full shortly thereafter. If you do not pay it back, you are hit with taxes and penalties.  If I were you, I would roll it over into an IRA for the reasons you mentioned. My opinion is that in general, it is probably not a good idea to borrow at a cost in order to make your RRSP contribution.  Banks, of course, have an interest in loaning you money.  Don't expect their literature to be objective on the matter!  They are selling you a product and the advice is biased.  What better way to double-dip than to get guaranteed interest payments from you, as well as ongoing fees for (probably also) getting your loan money invested in their high-fee mutual funds? A year's RRSP contribution room allowance isn't use it or lose it — unlike 401k contribution allowances in the U.S.. That is, unused RRSP contribution room accumulates and you can take advantage of it in later years. If we couldn't carry our RRSP contribution room over, I might feel different about the general case for RRSP loans. Yet there are two specific cases I can think of where it may make sense to borrow and pay back: (a possible case) ... if your tax rate is currently in a high bracket (e.g. 46%), and you anticipate being in a lower income and bracket next year (e.g. 35%), then it would make sense to take advantage of the higher tax savings in the current tax year.  If you waited until the following year to take the deduction, you'd lose out on 11% of the deducted amount.   For a typical person whose income is level or increasing from year to year, this isn't likely to be applicable, but it could help somebody who is going on leave or otherwise has irregular income. (a foolish case) ... if you knew, somehow, that you could realize a return on your invested RRSP money exceeding the pre-tax earnings required to pay the interest on the RRSP loan.  However, I would suggest this is foolish bet to make.  The interest you pay is guaranteed, but the return you are expected to get is probably not (or if it is, it is probably a return lower than what your bank wants to charge on the loan.) If for some reason it does make sense for you, take the money and invest it somewhere better than the high-fee mutual funds the bank is also pushing.