Response to Gina, yes I totally agree. That was my point in my 1st post. People are sometimes so busy trying to save a couple bucks that they may not even know they are doing the wrong thing. Only experience and a lot of research or the guidance of a good advisor can tell.

I mean this whole community is made up of small business owners, and it seems logical that other small business owners should serve them (if it makes sense of course). Otherwise, we would all still be at the corporate office doing we did before-not able to be creative, and serve clients as they should be.

For James Lindon-There are definitely some benefits and drawbacks to either owning taxable or retirement plan investments. I put a brief hypothetical example below of what someone with similar reservations may be comfortable with, but there are those who are diametrically opposed to certain things and if it makes sense then do it, only in the end will a person know what the correct action should have been.

Ok, hypothetically lets say a small business owner that does not need a write-off and does not want to take money later that is taxed at the ordinary income rate (retirement  income rate is typically a lower rate than your current rate). With type of profile, I would say that if the owner had access to a 401k plan (some allow brokerage options to purchase investments other than mutual funds) then use a Roth 401k contribution (not all plans have this). The money you place in the plan is after-tax, the money will compound without any additional tax, and the money can be taken at retirement tax-free…to name a few highlights. ---

Also, taxable stocks traded less than a year are subject to normal capital gains tax (ordinary income), and taxable mutual funds will give you both types whether you buy and sell or not because short/long term/income tax are embedded in the funds from prior/current owners (people who know this are those that have purchase a fund outside a retirement plan and still received a 1099 at year-end even though they did not transact in the fund).

Again this is not advice-advice is given on a one-on-one basis only, but the question is general enough to warrant a general answer and a hypothetical example. Please verify this information independently to make your own determination.

Aaron Smith

aaron@smithadvisor.com

John, thanks for your comments.  I do not deal with investments in real estate for retirement funds in the book.  401k funds are not set up for direct investment in real estate usually you have to roll it over to a self directed IRA to be able to make real estate investments.  Also you lose the tax benefits of the 401k in a real estate transaction, the gain becomes long term gain and incurs taxes as such. (UBTI)?  Gina, help me out here...

Also illiquidity in the asset makes you unable to avoid a downturn in the real estate markets and if it comes at the wrong time, ie. when you HAVE to access your cash for retirement it could be a disaster, so I have not favored real estate as a retirement investment unless it was your primary residence or a vacation home, owned in your personal name.

I had a client one time who took everything he had (no 401K) and sank it into 1st and 2nd mortgages.  Last I heard he was still laughing all the way to the bank, earning a superior return secured by the real estate.  He worked with the people the mortgage cos didn't want.

I have always favored balance in all things.  If your 401 K has a REIT option it might make some sense.  Depends on the balance of your other assets.  As always if you have a trusted professional, they are best qualified to give advice on your personal situation.