There is much debate on which is better, how much, and why. There are valid arguments on both sides of this argument as well. 

Deciding which path to take affects your financial future, and understanding it is essential. 

If we look at the advantages of both, it can help clear the air and help you decide which is best for you. 

401(k) plans and real estate investing are both popular options for saving for retirement. Here are some advantages of investing in a 401(k) plan compared to real estate:

401(k) VS. Real Estate

Ease: One advantage of 401(k) plans is that they are easy to set up and manage. Many employers offer 401(k) plans and automatically enroll employees unless the employee opts out. 

Contributions to a 401(k) plan are also automatically deducted from an employee’s paycheck, so there’s no need to remember to make contributions.

Tax advantages: 401(k) plans offer several tax benefits that can help investors save for retirement. Contributions to a 401(k) plan are made with pre-tax dollars, which can lower an investor’s taxable income in the current year. 

In addition, the money in a 401(k) plan grows tax-free until it is withdrawn in retirement.

Protection and safety: 401(k) plans are generally considered a safe and stable option for retirement savings. The money in a 401(k) plan is typically invested in a diversified portfolio of stocks, bonds, and mutual funds, which can reduce the risk of losses. 

401(k) plans are federally insured, which means that account holders’ savings are protected if the plan’s sponsor goes bankrupt.

Other advantages: A few other advantages to investing in a 401(k) plan are worth considering. Many employers offer matching contributions to their employees’ 401(k) plans, free money for the employee. 

In addition, 401(k) plans have high contribution limits, meaning that investors can save much more money in a 401(k) plan than in other retirement accounts, such as traditional IRAs.

Overall, investing in a 401(k) plan is a great way to save for retirement. It offers ease, tax advantages, protection and safety, and the potential for matching contributions from an employer. However, it is essential to remember that 401(k) plans are not the only option for retirement savings. 

Financial advisors can help investors determine the best way to save for retirement based on their circumstances. Investing in a 401(k) plan can be a good option for those who want a simple and easy-to-manage retirement vehicle, but there may be better choices for some. 

In particular, those who are self-employed or work for a small business that does not offer a 401(k) plan may consider other options, such as traditional IRAs or real estate investing. 

Ultimately, the best way to save for retirement will depend on an individual’s financial goals, risk tolerance, and investment portfolio.

Real estate Vs. 401(k)

Investing in real estate can be a great way to save for retirement and achieve financial freedom. Here are some advantages of investing in real estate compared to 401(k) plans:

  1. Higher margins: Real estate investments can offer higher margins than 401(k) plans. The stock market has the potential for high returns but can be volatile. Real estate has the potential for steady, long-term growth. Real estate investors can achieve high returns with the right strategy and consistent action.
  1. Many ways to make money: There are many ways to make money with real estate investments. In addition to equity and forced appreciation, real estate investors can benefit from tax advantages, rental income, and hedging against inflation. These various income streams help diversify an investment portfolio and provide a steady cash flow.
  1. Tax advantages: Like 401(k) plans, real estate investing offers tax advantages. Real estate investors can deduct mortgage interest, property taxes, and other expenses from their taxable income, lowering their overall tax bill. In addition, real estate investors can benefit from the 1031 exchange, which allows them to defer capital gains taxes when they sell a property and reinvest the proceeds in another property.
  1. It’s protected: While the stock market can be volatile, real estate is a tangible asset that is less prone to market fluctuations. This means that real estate investments can be a more stable and secure way to save for retirement.
  1. Leverage: Real estate investing allows investors to leverage their money by using borrowed funds to purchase a property. Leverage allows investors to buy a larger property or invest in multiple properties, which can increase their potential returns.
  1. Unlimited: Unlike 401(k) plans, which have contribution limits, there is no limit to how much money an investor can put into a real estate investment. This makes it an excellent option for those who want to save as much as possible for retirement.
  1. No penalties: While 401(k) plans have early withdrawal penalties for those who take out their money before retirement, real estate investments do not have such penalties. This can make real estate a more flexible option for those needing access to their money before retirement.
  1. Non-efficient markets: While the stock market is often efficient, real estate markets can be less efficient, creating opportunities for savvy investors. Inefficiency makes real estate more attractive for those who want to take advantage of market inefficiencies.

Real estate investing can be a great way to save for retirement and achieve financial freedom. While it comes with its own risks, the potential for high returns, tax advantages, and stability make it an attractive option for many investors. 

Those interested in real estate investing can consider using a self-directed IRA or Roth IRA to save for retirement, or they can invest in rental properties, apartment buildings, or real estate investment trusts.

Who Wins?

Luckily, this battle ends in a draw because as an investor, you have the option of doing one, the other, and even other investment vehicles. The ultimate goal is to maximize income, reduce taxable income and increase retirement as quickly and safely as possible. 

By maximizing tax-advantaged investments and putting the remainder of your savings into a cash-flowing investment property or syndication, you are creating a hybrid retirement strategy. 

In addition, you can use your self-directed IRA or 401k to invest in real estate. 

Self-Directed IRA

A self-directed individual retirement account (IRA) is a type of retirement account that allows the account holder to have more control over their investment options. With a self-directed IRA, you can invest in a broader range of assets beyond traditional stocks, bonds, and mutual funds, such as real estate, precious metals, and private placements.

There are two main types of self-directed IRAs: traditional IRAs and Roth IRAs. A traditional IRA allows you to contribute pre-tax dollars, which can grow tax-deferred until you begin taking withdrawals in retirement. A Roth IRA, on the other hand, allows you to contribute after-tax dollars, and the contributions and any earnings can be withdrawn tax-free in retirement, provided certain conditions are met.

Using a self-directed IRA to invest in real estate can be an excellent way to diversify your retirement portfolio and potentially generate additional income. However, it’s essential to keep in mind that some rules and restrictions must be followed when using a self-directed IRA to invest in real estate. 

For example, the IRA cannot be used to purchase a property that you or certain disqualified persons (such as your spouse, children, or specific business associates) will personally use. It’s essential to carefully research and understand these rules before using a self-directed IRA to invest in real estate.

Investing in real estate through a self-directed individual retirement account (IRA) can be a powerful tool for building wealth and achieving financial freedom. With a self-directed IRA, you have the ability to invest in a wide range of assets beyond traditional stocks, bonds, and mutual funds, including real estate, precious metals, and private placements. 

Here are a few things to consider if you’re thinking about using a self-directed IRA to invest in real estate:

Benefits of Investing in Real Estate with a Self-Directed IRA:

  • Diversification: Real estate can be a good way to diversify your retirement portfolio and potentially generate additional income through rental properties. 

Owning a rental property can provide a steady stream of rental income, and the value of the property may appreciate over time.

  • Potential tax benefits: Owning real estate through a self-directed IRA can provide tax benefits in the form of deductions for mortgage interest, property taxes, and certain types of expenses related to the property. These deductions can reduce the overall tax burden on your retirement income.
  • Control over investment decisions: With a self-directed IRA, you have more control over your investment decisions and can choose to invest in specific properties or projects that align with your investment goals and risk tolerance.

Drawbacks of Investing in Real Estate with a Self-Directed IRA:

  • Risk: Investing in real estate carries inherent risks, such as the potential for vacancies and unexpected repairs. These risks can impact the overall performance of your self-directed IRA.

Real estate syndications can be another option for those interested in investing in real estate through their self-directed IRA. A real estate syndication involves a group of investors coming together to fund the acquisition and management of a property or properties. 

The syndication can be a partnership, limited liability company, or corporation. One of the main benefits of investing in syndication is the ability to pool resources with other investors and access larger, potentially more lucrative investment opportunities.

Using a 401(k) or IRA to invest in real estate can also be a good option for those who want to diversify their retirement portfolio and potentially generate additional income. With a 401(k), you can roll over your account balance into a self-directed IRA, which will allow you to invest in a wider range of assets such as real estate. 

However, it’s important to carefully research and understand the rules and restrictions that apply to using retirement funds to invest in real estate, as well as the potential risks and rewards.

Should you invest in Real Estate or other asset Classes? 

This is completely personal and several factors such as market, risk tolerance, runway (how much capital vs. expenses), what timeframe is your expectation of return? 

Depending on your investment profile, you might like real estate or it might not be an ideal investment. 

If you would like to learn more about the various types of real estate investments and syndications we have coming online, please join our investor club to gain access. 

As a top-performing sales professional in supply chain/logistics for almost 20 years, Jeff Davis has been putting his commissions to work for him in real estate since 2015 and is now partnered in almost 2000 units across 4 states in the US