There’s no doubt that the 401(k) retirement plan has been a popular means for Americans to save ahead for future retirement. But the question remains … Is a 401(k) really the best place to invest your money if you’re looking to build long-term wealth? Or, could investing in something else, such as real estate, be a better alternative?
Ultimately, the answer for YOU lies in your specific money and retirement goals. And as with anything related to your income, investments, and retirement, it’s always smart to run your ideas by a certified investment professional. You may also want to work closely with an accountant to ensure you’re maximizing your tax benefits.
In my personal experience, I’ve found that investing in real estate offers some distinct advantages over investing in a 401(k) plan. Today, I’ll walk you through the top 5 benefits I’ve discovered.
5 Reasons Why I Invest in Real Estate vs. a 401(k)
1. Real estate is a tangible asset.
Investing in real estate means you have a piece of property that you can see and touch. The tangible nature of the asset means that you also have more control over it. Not to mention the fact that property values typically don’t fluctuate as wildly as stocks, bonds, and mutual funds.
2. Real estate investments provide monthly cash flow and passive income.
When you invest your money in a 401(k), it’s completely tied up until you reach retirement age. With real estate investments like rental properties, however, you can enjoy positive cash flow month after month, year after year. Not only will this give you a higher income potential TODAY, it’ll also provide another wealth-building avenue for RETIREMENT.
3. You can use someone else’s money to buy an asset that appreciates.
With a 401(k), the government sets limits on how much money you can invest each year. You’re also limited by the amount of income you earn and how much you have left over to invest.
When you invest in real estate, you can leverage someone else’s money (the bank’s) to purchase an asset that appreciates. Typically, property values outperform inflation and can set you up for significant profits down the road.
4. Real estate investing offers distinct tax advantages.
When you have rental income, it’s often taxed at a lower rate than ordinary earned income. This benefit alone can save you a significant amount of money in taxes. Your taxable income is further reduced by being able to deduct things like mortgage expenses as well as property taxes and maintenance costs.
5. Real estate investments offer a hedge against inflation.
Whenever the cost of living significantly increases, property values typically do, too. So do rental rates so you’re able to keep up with or even surpass inflation when you have rental properties.
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FAQs
Real estate investing offers distinct tax advantages.
This benefit alone can save you a significant amount of money in taxes. Your taxable income is further reduced by being able to deduct things like mortgage expenses as well as property taxes and maintenance costs.
Why is real estate better than a 401k? ›
Real estate investing offers distinct tax advantages.
This benefit alone can save you a significant amount of money in taxes. Your taxable income is further reduced by being able to deduct things like mortgage expenses as well as property taxes and maintenance costs.
Is it better to invest in real estate or IRA? ›
Real estate offers much higher earnings potential, but it's hard to beat a Roth's tax-free withdrawals—not to mention the years of tax-free compounding. When in doubt, speak with your financial planner or advisor, who can help you determine the best investment strategy for you and your situation.
Why is real estate a good investment for retirement? ›
Investing in real estate can be a practical method to earn money for retirement. Real estate offers a chance to create passive income by renting properties, ensuring a consistent cash flow in retirement. This income adds to your retirement funds and boosts equity, enhancing your total net worth.
Is it better to save for a house or 401k? ›
Either save up to buy a home or invest,” says Kris Whipple, partner and financial advisor at Kristopher Curtis Financial in Nashville, Tennessee. “I say do both. If the house is more important to you, lean that way, but don't give up the opportunity of compounding growth.”
Is real estate the best form of investment? ›
On its own, real estate offers cash flow, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation. Real estate can also enhance a portfolio by lowering volatility through diversification, whether you invest in physical properties or REITs.
What are three disadvantages of 401k accounts? ›
Challenges of a 401(k) retirement plan
- Most plans have limited flexibility as it relates to quality and quantity of investment options.
- Fees can be high especially in smaller company plans.
- There can be early withdrawal penalties equal to 10% of the amount withdrawn before age 59 1/2.
Rates for high-yield savings accounts fluctuate and can offer a higher return rate than traditional savings. Real estate investments often offer consistent returns over time. That could mean that one occasionally outperforms the other. But you also have to consider tax implications.
How to convert 401k to real estate without penalty? ›
You cannot hold real estate in your 401(k). If your goal is to invest in real estate, the best option is to roll over your 401(k) funds to an SDIRA. Doing so allows you to hold the real estate in your retirement account without penalty or taxes.
Why is real estate a better investment than stocks? ›
Stock prices are much more volatile than real estate. The prices of stocks can move up and down much faster than real estate prices. That volatility can be stomach-churning unless you take a long view on the stocks and funds you purchase for your portfolio, meaning you plan to buy and hold despite volatility.
Real estate consistently appreciates in value, even during economic downturns. On average, real estate in the US appreciates between 3-5% annually, making it a reliable investment option for long-term growth. Investing in real estate can help you plan for retirement.
What is a better investment than a 401k? ›
Good alternatives include traditional and Roth IRAs and health savings accounts (HSAs). A non-retirement investment account can offer higher earnings but your risk may be higher.
What is the 4 rule retirement real estate? ›
The 4% rule in retirement planning is used to determine how much you should withdraw from your retirement account each year. Basically, the idea is to give yourself a healthy stream of income, while maintaining an active account balance during retirement.
Should you take money out of 401k to invest in real estate? ›
Though you can withdraw money from retirement savings, such as 401(K) accounts, to cover the cost of purchasing rental properties, the purpose of them is to focus on long-term savings. Therefore, they discourage you from withdrawals through an early withdrawal penalty.
Should you prioritize savings for house or retirement? ›
But here's the deal: Compound interest takes time to work. A lot of time! Investing is a marathon, not a sprint. That's why we recommend putting 15% of your income toward retirement first before you start throwing extra money toward your mortgage.
Is it better to pay off house or put money in retirement? ›
Unfortunately, while it's better to pay a mortgage off, or down, earlier, it's also better to start saving for retirement earlier. Thanks to the joys of compound interest, a dollar you invest today has more value than a dollar you invest five or 10 years from now.
Why brokerage is better than 401k? ›
The major plus to a brokerage account is its superior liquidity in comparison to a 401(k) account. There is no penalty for withdrawing funds at any time, although an investor may experience losses if he or she sells when the market is down. Brokerages also impose no contribution limits.
Is real estate the best way to retire early? ›
If you want to retire earlier than expected, you may want to look into investing in real estate. There are numerous ways that real estate investments can help you build enough wealth to retire earlier. Here's a dive into the real estate investments worth considering to help you leave your job sooner.
