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Real Estate vs. 401K & IRA

What is a 401K?

A 401K is a defined contribution plan established offered by an employer to an employee for retirement. Eligible employees for a 401K can accept a salary reduction where they contribute to their retirement plan on a post or pre-tax basis. Employers who offer 401K plans define the terms of the plan, and often can match contributions. Funds in a 401K are invested by the plan’s financial team on the market with the potential to grow with tax deferred.

The terms and conditions of a 401K are very important. With a 401K there are caps or maximum limits placed on the plan by either the employer or Internal Revenue Service(IRS). Typically, you’ll see a limit on salary deferral contributions. In addition, you’ll see terms regarding penalties for early withdraw, withdraw amounts, and how an employee can withdraw funds from their plan. It is crucial that you review the terms and conditions of a 401K prior to signing any contract. You absolutely need to know who will be handling your money, and how they plan to handle it. Financial teams that manage 401Ks are usually hired by the employer to allocate investments. While the terms and conditions are important in a 401K, there are advantages. Advantages of investing in a 401K are as follows:

  • There are high contribution limits, so unlike an IRA, a plan holder can contribute $17,000 per year if 49 years of age or younger, and $22,500 if over 50 years of age.
  • A plan holder can deduct the amount placed in the 401K from their net income tax.
  • Tax is deferred in that there is no tax on capital gains until funds are withdrawn.
  • Employers, under specific terms, can match the employee’s contribution which doubles the employee’s contribution on a regular basis if defined by the terms of the plan.

What is an IRA?

An IRA is a traditional retirement account for an individual. Individuals that start an IRA can allocate pre-tax income toward their plan, which is then invested by the plan’s financial team on the market with the potential to grow with tax-deferred. This means only upon withdraw are capital gains taxed. Depending on the investor’s vision, funds in an IRA can be placed in different investment vehicles on the market. Professional financial managers are responsible for executing the terms of an investor’s IRA contract. In doing so they, they monitor and allocate the funds in an IRA.

There is a maximum annual contribution limit with an IRA. As of now, there is a limit of $5,500 for tax payers of 50 years of age and younger. Like a 401K, there are specific conditions with an IRA that will penalize plan holders if they withdraw early, or before the termed retirement age. Penalties may also apply regarding how funds are withdrawn and how much of the plan is withdrawn at a time. Similar to 401Ks, there are plenty of terms and conditions in an IRA, but there are definetly noteworthy advantages as follows:

  • Funds you allocate to an IRA are tax-deferred.
  • Holders of an IRA can track and change metrics of their allocation to perform better.
  • Contributions can be deducted depending on the plan holder’s tax bracket.

Real Estate vs. 401K & IRA Comparison Chart

401K & IRA
Hard Asset
Real Estate Hard Asset
401K & IRA
401K & IRA Hard Asset
Real Estate Inflation
401K & IRA
401K & IRA Inflation
High Cash Yield
Real Estate Cash Yield
401K & IRA
401K & IRA Cash Yield
Real Estate Leveraged
401K & IRA
401K & IRA Leveraged
Tax Advantage
Real Estate Tax Advantage
401K & IRA
401K & IRA Tax Advantage
Equity Buildup
Real Estate Equity Buildup
401K & IRA
401K & IRA Equity Buildup

Real Estate vs. 401K & IRA Comparison Details

Are 401Ks & IRAs Hard Assets?

Since a 401K and an IRA are not a tangible or physical items of worth owned by an individual or a corporation, they are not considered hard assets.

Are 401Ks & IRAs affected by Inflation?

Depending on which investment vehicles your contributions are put toward, inflation could impact growth in your 401K and IRA. You typically would need a select mix of investments to keep pace with inflation.

Do 401Ks & IRAs have High Cash Yields?

401K and IRA performance is not guaranteed. Depending on your investment options and selected allocations, investors may experience a range of results with their plans.

Can 401Ks & IRAs be Leveraged?

You can borrow against your 401K or IRA. For instance, let’s say you want to buy a home. You can borrow from your 401K and pay yourself back on the loan’s principal and interest. Typically, you’ll see people borrow against their 401K for a down payment on a real estate property. Keep in mind that leveraging against a 401K for a down payment does not equate to how you can leverage $100,000 in a real estate transaction for a $500,000 property.

Are there Tax Advantages from having 401Ks & IRAs?

Yes, taxpayers can take advantage of deductions based on their contributions on an annual basis for a 401K and IRA. Keep in mind however, that upon withdrawing from an IRA or 401K, even if you’ve waited till retirement age, capital gains income will be taxed.

Do 401Ks & IRAs build Equity?

401Ks and IRAs simply do not build equity like a real estate investment where equity buildup is possible through debt decreasing or property value increasing, mutual fund investments do not equate to ownership of the holdings or securities. Funds allocated to either a 401K or IRA are invested in the market through bonds, stocks and other securities. The value of securities determines how much you can gain or lose on your investment, like how investing directly into stocks and bonds work.

Risks of Investing in a 401K & IRA

While a retirement plans like 401Ks and IRAs have advantages for building wealth, there are associated risks you should be aware of. For instance, at the time of starting your 401K it may not be clear how your contributions will be invested in money markets. It is highly unlikely that the individuals you worked with upon starting your 401K or IRA will be the same ones managing them when you are looking to retire. Similarly, because your contributions will be invested in money markets, there is always the risk of low performing portfolios, plummeting stocks, and bond defaults.

In Summary

Starting and contributing to 401ks or IRAs are smart investment moves, but you shouldn't stop there. It never hurts to have one of these plans in a balanced portfolio. By all means if you are new to investing and your employer offers you a 401K plan, take it, especially if they are willing to match your contributions. It will always be your responsibility to review the terms and conditions you agree to in any investment deal, so be sure you are entirely aware of what you are getting yourself into. Similarly, if you have capital to invest, throwing some of it in an IRA isn’t a bad idea if you have other larger asset classes you can contribute more too. Take for instance real estate. Investing in real estate gives you the option to build equity with tax advantages, and should you decide to sell your property you are not penalized. Your property will never be valued at $0, and it can be leveraged way more than a 401K or IRA. Real estate is a promising industry when compared to restriction ridden retirement plans like 401Ks and IRAs. The goal is to make your money grow as much as possible for you in an investment, choosing the best investment stream should be part of that goal.

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