401(k) VS Investing In Real Estate: Which Is Right for You?

Should I Invest in Real Estate or 401k?

When choosing between investing in a 401(k) or a rental property, it’s important to consider your long-term goals. Whether you want to use retirement accounts to support your dreams of traveling the country or you wish to capitalize on the real estate market, Spartan Invest can help you create a plan to bring your financial goals to life. In this article, we’ll cover the basics of investing in a 401(k) retirement account, increasing your portfolio with real estate investments, and using both options to achieve ultimate financial freedom. Keep reading to learn more!

What to Know About Investing Through a 401(k)

So, what is a 401(k)? Simply put, a 401(k) is a type of tax-advantaged retirement account available to you through your employer. By allocating a portion of your monthly income, you can invest in a diverse range of stocks, bonds, and other funds within your company’s 401(k) plan. Typically, you can choose a percentage of your gross income to dedicate to your 401(k); some employers will even match your contributions up to a certain percentage or dollar amount. The beauty of this investment option lies in its simplicity; it allows you to effortlessly set aside funds for your retirement without any active involvement on your part.

Tax Benefits of Traditional and Roth 401(k)s

When you invest in a 401(k), you have two options. You can invest your money in a Roth 401(k) or a Traditional 401(k). With a traditional 401(k), your contributions are tax-deferred. This means that the contributions are made before income tax can be deducted, which can lower your overall income. The funds within a traditional 401(k) account grow tax-deferred over time, meaning taxes are only paid when withdrawals are made during retirement. Traditional 401(k)s provide an opportunity for long-term savings and potential employer-matching contributions, making them a valuable tool for building a safe and secure financial future.

With other retirement accounts, such as a Roth 401(k), you will contribute a portion of your pre-tax income, which grows tax-free, similar to a traditional 401(k). However, what sets the Roth 401(k) apart is that you will only pay taxes on your initial contribution, and all distributions are considered non-taxable income. This means you can avoid pesky fees like a capital gains tax or other taxes that can significantly affect your savings. A Roth 401(k) offers a way to diversify your savings by taking advantage of tax-free growth and withdrawals, providing flexibility and potentially reducing tax burdens in the long run.

Employer Contributions

Employer contributions are one of the most significant benefits of a 401(k). These contributions can come in different forms, such as matching contributions or profit-sharing contributions. Matching contributions involve your employer matching a percentage or dollar amount of your own contributions up to a specific limit. This essentially adds “free money” to your retirement account! Employer contributions can significantly enhance the growth potential of your 401(k) account, helping you accelerate your retirement savings and give you more spending opportunities and investment options.

401(k) Earning Potential

You may be wondering, “How much can I earn with a 401(k)?” We’re here to break down the numbers for you. While many factors will determine your savings, including how much you earn, the age you started contributing, and employer match, we can still look at average 401(k) balances across several age groups. According to Vanguard, those under 25 have an average balance of $4,048, which may not seem like much, but it is a great starting point at what is typically the beginning of your career. For those closer to the end of their working years, 65 and older, their average balance is $200,358. These numbers show us that when you begin contributing to a 401(k) as soon as possible, and then throughout your career, you can retire with a sizable nest egg!

Advantages of Real Estate Investments

For investors looking for a more tangible, hands-on approach to increasing their monthly cash flow, real estate is an ideal option. While real estate investments often require a learning curve and a bit of hard work, the potential earnings are hard to ignore. Investing in rental properties is a great way to diversify your portfolio, generate passive income, and create a safety net for yourself and your family. Here are a few of the key benefits of investing in real estate versus a 401(k).

Potential for Higher Returns

Investing in real estate comes in many forms and many different ways to make money. From flipping a home in a nearby neighborhood to investing in a rental property, the tangible nature of real estate assets, paired with the potential for appreciation over time, often leads to significant gains. Investing in rental real estate can provide a steady cash flow, taking your ordinary income to the next level. As your equity grows and rental income becomes more consistent, this will open you up to more investment opportunities, giving you greater power to expand your portfolio of investment property.

Tax Advantages of Real Estate

Investing in real estate is beneficial in many ways, including significant tax benefits. Each property experiences annual depreciation, resulting in the creation of “paper losses” every year. This holds true even if the property is generating profits. These passive “paper losses” are essential as they can offset your passive income with rental cash flow. Additionally, real estate offers the option to leverage an accelerated bonus depreciation, allowing you to escalate these paper losses earlier than was previously feasible.

You can also work towards becoming a real estate professional (REPS), You can achieve this by dedicating 750 hours to managing your real estate holdings. This achievement allows you to utilize your paper real estate losses to counterbalance your active W2 or 1099 income.

Unlimited Earning Potential

The potential for unlimited earnings is one of the most significant benefits of investing in real estate. When you invest in real estate, your earning is only limited by how much money you choose to dedicate to your assets. This is vastly different from investing in tax-advantaged retirement accounts like a 401(k).

With a 401(k), you must abide by annual contribution limits. For example, in 2023, you are limited to just $22,500 in total contributions. While contributing to a 401(k) throughout your career is beneficial, there are no dollar limits to your real estate investments. This means your portfolio can expand as much or as little as you wish!

Best of Both Worlds: Investing In Real Estate With a 401(k)

If you’re still unsure which investment strategy is right for you, you can actually use both to your advantage! How? You can use your 401(k) savings to begin real estate investing by transferring your funds into a self-directed Individual Retirement Account (IRA). Typically, these accounts are used when changing jobs or leaving an employer. However, you can establish an IRA at any time, and you can even establish an IRA alongside your existing 401(k).

A self-directed IRA allows you to manage the account and determine your investment choices. However, navigating the intricate guidelines associated with self-directed IRAs is crucial to avoid potential IRS tax penalties. It’s important to note that you’re prohibited from residing in real estate acquired through a self-directed IRA, and any expenses linked to the investment property must be covered using IRA funds.

The primary advantage of utilizing a self-directed IRA for real estate investment is utilizing the tax-deferral benefits of your IRA with the advantageous returns of real estate investment, including cash flow and asset appreciation. Real estate and 401(k) investments represent distinct avenues for retirement plans and profitable financial assets.

Increase Your Investment Portfolio with Spartan Invest Today

At Spartan Invest, we specialize in guiding individuals and businesses through every step of their real estate journey, including acquisition, remodeling, leasing, property management, and beyond. We are dedicated to delivering exceptional results so that you can enjoy the benefits of a solid legacy. Browse our current inventory and get in touch with one of our experts to discuss investment opportunities. You can contact us at 205-202-4118 on weekdays from 8 AM to 5 PM (CST), or you can email us at hello@spartaninvest.com. We look forward to hearing from you!

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