401 Cabin or Individual Retirement Abode

 Why a Vacation Home is better than a 401k or IRA

Do you feel  the need to contribute to a retirement account such as a 401K or IRA? Do you wish you could get a break from the Phoenix heat? Here’s why buying a 401 Cabin is the answer to both questions!

Cabin for sale in Forest Lakes

Individual Retirement Abode or 401 Cabin

In 1981, the Economic Recovery Tax Act (ERTA) allowed American workers under age 70½ to contribute to a Retirement Plan and defer income tax payments on the amount contributed (within certain limits).  There have been many modifications, updates to income limits and changes to law since. For the sake of this article the important thing to know is if you fall within the current income limits you can participate in these types of investments and defer income tax payments on the contributions. What that means is you still have to pay the tax on your contributions just not until you retire and take disbursements from your Retirement Account.

Most people these days have heard of these types of Retirement Tax shelters which are known by many names including IRA or Individual Retirement Account, 401k, 403b, 457, SEP Plans (Simplified Employee Pension), etc. The one thing they have in common is you don’t have to pay income tax on the money you invest in the year you earned the income. In other words,  your contribution amount is deducted from your earnings in the calendar year you invest, before tax. Sounds pretty enticing , right? It is enticing but most people don’t realize the pitfalls! Did you ever hear the saying “there’s no such thing as a free lunch”?

If you were making a monumental mistake in how you invest for retirement when would you want to know about it? 

Would yesterday be too soon? Obviously not. Of course you would want to know ASAP! So, here it is: Traditional IRA, 401K ,etc., plans are one of the WORST ways to invest your retirement dollars! The reason why is the Federal and many State Governments are your investment partner for life and you can’t get rid of them! It will likely get worse and is unlikely to get better. The key thing to think about is when will you have to pay the tax and how much is it?

With Traditional Retirement plans you defer the income tax from the year you earn it to when you take disbursements from the account at retirement age. Generally, you can begin taking disbursements without penalty at age 50½. At age 70½ you must take minimum disbursements or the penalty is 75%! So suffice it to say, you are going to take it sometime. Traditional Retirement accounts are taxed as regular income tax. Federal Marginal Income tax rates are tiered or bracketed based on annual income and currently start at 10% and max at 39.5%.  But that may not be all you owe. Retirement income can trigger other things such as Social Security tax. You may, for example, be in a 15% Marginal Bracket and still paying in excess of 55%* of your IRA distributions.   Most people think they will be in a lower tax bracket at retirement but history says the opposite is true.

What would happen if instead you bought a Cabin? You would have a mortgage payment. All the interest you pay for the Mortgage is tax deductible from your income before tax, the same way as the IRA contribution was. Cabins historically go up in value over time similarly like market investments in your IRA do historically. Unlike the IRA, Cabins are a leveraged investment. That means that in the beginning you will likely get a much higher annualized return with a Cabin than you would investing in the the market. For example;  if you bought a Cabin for $250k with 5% down your cash investment  would be $12,500 down payment plus closing costs of 2% or $5,000, for a total cash investment of  $17,500. Houses appreciate on the basis of value. If the Cabin increases by 4% in the first year it would be worth $10,000 more or $265, 000. You would have made  $10,000 equity on a $17,500 investment or more than a 57% annualized return. The same $17,500 invested in an IRA would at a generous 10% return be only a $1,750 increase.  There’s plenty of variables but at the end of the day both will perform as investments if history repeats.

Here’s a hypothetical example:

Plan A, invest in a 401K:

Let’s say you earn $95K per year, rock at saving, and are making a contribution to your 401k  of $18K or 19% of your annual income for 20 years . Your before tax income is reduced by the contribution amount of $18K making your taxable income only $77K.  If your 401k increased by 5% per year for 20 years compounding annually it would have a value of $672,700. If you had to pay the IRS at an Effective Marginal Rate of 25% (it will be more but for the sake of example…)you would ultimately pay $168,176 in Income Taxes and be left with $504,528.

Plan B, invest in a 401Cabin:

You Purchase a Cabin for $250,000 with 10% down payment and a loan amount of $225,000, payable at 4% interest for 20 years. Your annual cash payments including Taxes and Insurance will be $18,200. If the Cabin appreciates at a rate of 4% per year, in 20 years it would be worth $547,780 and have a long term capital gain of $297,780. If you had to pay a Capital Gains tax of 15% that would be $44,667 and leave you with $503,113. BUT WAIT A MINUTE; The Government allows you to get up to $250k in Capital Gains tax free on your Primary Residence if you occupied it for at least 3 of the last 5 years. Most people move to their Cabin as their Primary Residence when they retire. If you made it your Primary Residence at least 3 years before you sold the Cabin you would get the first $250,000 of Capital Gains tax free. If you were married or owned with a partner you would get up $500k so the entire $297,780 Capital Gain is tax free, leaving you with the entire $547,780! At worst, if you are single and own the Cabin as your sole and separate property you would have a remaining Capital Gain of $47,480 and a Capital Gains Tax of $7,122, leaving you with $540,658.

If you crunch the numbers it really makes sense to buy a Cabin as an investment for your retirement. But the biggest reason to buy a Cabin? It’s the photo album! You’ll have 20 years of family fun and memories to last a lifetime! You can’t go to your 401k on the weekend!

See all the latest listings of cabins for sale in the Mogollon Rim Country Below

If you would like more information about the 401 Cabin or Individual Retirement Abode or to get real-time news About Cabins for sale in Arizona complete the form below and we’ll get right back to you!

 See all the latest Cabin Listings from Payson to Greer  here…

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6115 W Skyview Circle Pine 85544, The Portal Pine Creek Canyon Unit 2

$783,000
Bedrooms: 3
Baths: 3
Sqft: 3,300
MLS: #6211553
Broker: Coldwell Banker Bishop Realty
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1006 W Chatham Drive Payson 85541, Woodland Meadows Phase 2

$245,000
Bedrooms: 2
Baths: 2
Sqft: 1,456
MLS: #6155714
Broker: Realty Executives Arizona Territory
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5180 N Juniper Loop Pine 85544, The Portal Pine Creek Canyon Unit 3

$429,000
Bedrooms: 2
Baths: 2
Sqft: 1,104
MLS: #6200530
Broker: HomeSmart
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2286 Constellation Lane Overgaard 85933, Mogollon Air Park Unit 3

$445,000
Bedrooms: 3
Baths: 2
Sqft: 2,312
MLS: #6220125
Broker: West USA Realty
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338 Forest Service Rd 428a -- Pine 85544, Unsubdivided

$1,450,000
Bedrooms: 3
Baths: 3
Sqft: 2,330
MLS: #6220126
Broker: Coldwell Banker Bishop Realty
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2504 E Pine Island Lane Payson 85541, Pine Island AT Chaparral Pines

$730,000
Bedrooms: 4
Baths: 4
Sqft: 3,272
MLS: #6219630
Broker: Keller Williams Arizona Realty
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2901 W Palmer Drive Payson 85541, Country Club Vista Unit 2

$335,000
Bedrooms: 3
Baths: 2
Sqft: 1,329
MLS: #6218398
Broker: RE/MAX Desert Showcase
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4751 N Bear Circle Pine 85544, Strawberry View

$525,000
Bedrooms: 3
Baths: 3
Sqft: 2,112
MLS: #6220020
Broker: Coldwell Banker Bishop Realty
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6311 Sutter Drive Lakeside 85929, Pine View Summer Homesites Unit 2

$450,000
Bedrooms: 2
Baths: 2
Sqft: 1,591
MLS: #6218864
Broker: Hague Partners
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3310 Mogollon Drive Overgaard 85933, Pineland Acres

$284,900
Bedrooms: 4
Baths: 2
Sqft: 2,072
MLS: #6218603
Broker: Diane Dahlin's Pine Rim Realty
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209 E Phoenix Street Payson 85541, Pine Ridge Add Replat

$248,000
Bedrooms: 3
Baths: 2
Sqft: 1,680
MLS: #6209250
Broker: American Scene Real Estate
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4958 Cemetery Road Clay Springs 85923, Clay Springs Unsubdivided

$450,000
Bedrooms: 3
Baths: 2
Sqft: 3,000
MLS: #6219045
Broker: Realty Executives White Mountains
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1021 W Rim View Road Payson 85541, Stone Creek at Payson

$374,500
Bedrooms: 3
Baths: 2
Sqft: 1,981
MLS: #6219843
Broker: Keller Williams Arizona Realty
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2800 N Skyhawk Drive Overgaard 85933, Mogollon Air Park Unit 3

$475,000
Bedrooms: 3
Baths: 3
Sqft: 1,761
MLS: #6218962
Broker: West USA Realty
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1993 W Munsee Drive Payson 85541, Geronimo Estates Unit 2

$349,900
Bedrooms: 3
Baths: 1.5
Sqft: 2,100
MLS: #6203584
Broker: Coldwell Banker Bishop Realty
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ARMLS Listing Data last updated 4/11/2021 11:10 PM MST.

*Link to article about IRA taxes

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