Retiring Soon? 401k or Real Estate: Which One?
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For investors who are getting closer to retirement, it is important to know which investment vehicles will help them finally achieve financial freedom.
When talking about investment options with retirement in mind, 401(k) plans are usually brought up. But while investing in a 401(k) can have its benefits, it can ultimately push out your retirement.
With a 401(k), you have to reach a certain age before you can finally reap its benefits. This is why a lot of investors are more inclined to invest in securities that offer tax advantages, like real estate investing.
A 401(k) plan has a few similarities with real estate investing. Both are forms of long-term investment that can help you build wealth. They can also provide a stable source of income. In fact, they both offer various tax advantages. But their differences are worth noting.
Contributions made to a 401(k) are tax-deductible while rental income from real estate can sometimes be tax-free. This is just one of the significant differences between the two which we will discuss further in this article.
Here we will talk about whether a 401(k) retirement account is a better investment for someone who is close to retirement than real estate investing.
Real Estate Investing or 401(k): Which is Better for Investors Getting Close to Retirement?
401k plans are employer-sponsored retirement plans that allow employees to contribute pre-tax dollars from their salary towards retirement savings. These plans often come with matching contributions from the employer, and the contributions and earnings grow tax-free until withdrawn in retirement.
401k plans offer a convenient and low-maintenance way to save for retirement, and the potential for compound growth can be significant over time. With that in mind, this may be a better fit for employees who still have several years before retirement, as this will give their retirement account plenty of time to grow.
Real estate investing, on the other hand, involves buying and managing physical properties with the aim of generating rental income and capital appreciation.
Real estate investments can provide a steady stream of passive income, and may also offer tax benefits such as deductions for mortgage interest and property taxes. The disadvantage is that real estate investing requires a significant upfront investment. It also demands ongoing management, so investors need to be prepared to put in the work.
Some people may prefer the ease and low-maintenance nature of 401k plans, while others may enjoy the potential for higher returns and greater control over their investments that real estate investing can offer. It’s important to carefully consider the pros and cons of each option and consult with a financial advisor before making any investment decisions.
While both are viable options for retirement planning, a real estate investment may be the more suitable option if you are close to retirement and do not yet have a 401(k). Ultimately, the best investment will depend on your personal circumstances and preferences.
Benefits of a 401(k) Plan for Retirement
Achieving your retirement goals will not happen overnight. But a 401(k) plan can help get you on the right track.
A lot of companies offer this retirement savings plan as one of their benefits, and employees can take advantage of it to build their financial future. A 401(k) plan allows employees to contribute a portion of their pre-tax income to a tax-deferred investment account. This will then be invested in a variety of assets like stocks, bonds, and mutual funds. The goal is to grow the account balance over time. [1]
The earnings and contributions in the 401(k) are not taxed until they are withdrawn, usually at retirement age. There are penalties for withdrawing money before the age of 59 and a half.
One of the biggest benefits of a 401(k) plan is the tax advantages it offers. Contributions to a 401(k) plan are made on a pre-tax basis, which means they are deducted from your income before taxes are calculated. This can lower your taxable income and reduce your tax bill in the present. Additionally, investment gains in a 401(k) plan are tax-deferred, which means you don’t have to pay taxes on them until you withdraw the funds in retirement. [2]
Many employers offer a matching contribution to their employees’ 401(k) plans. This means that for every dollar you contribute to your 401(k), your employer may match a portion of it, up to a certain limit. This can be a significant benefit, as it allows you to save more for retirement without having to contribute as much of your own money.
If you change jobs, you can typically roll your 401(k) plan over into a new employer’s plan or into an IRA, which allows you to keep your retirement savings growing and avoid penalties for early withdrawal.
A 401(k) may not have a lot of options when it comes to what you can invest in, but it at least lets you contribute as much or as little as you want to your account. You are allowed to change your contribution levels at any time. [2]
401(k) plans truly shine if you start investing early on. This gives your money more time to grow. If you are an employer looking for a way to passively invest, this may be a good option for you.
That said, you may want to support your existing 401(k) with an investment option that lets you build your wealth sooner and may potentially help you retire earlier. Let’s discuss the benefits of investing in the real estate market.
Benefits of Real Estate Investing for Retirement
For investors who want more versatility and investment options than what their 401(k) offers, real estate investing is the perfect alternative. There are many different ways to invest in real estate, from investing in a real estate investment trust (REIT) to flipping houses.
Real estate can be a great investment for retirement for several reasons. If you decide to purchase a rental property, you can enjoy a steady source of income in the form of rent payments. Some investors go this route to supplement their retirement income. [3]
Over the long-term, real estate values tend to appreciate, which means that your investment could increase in value over time. This can be particularly beneficial for retirees who are looking for a stable and reliable investment that will continue to grow over time.
Just like a 401(k), real estate offers a number of tax benefits, including the ability to deduct mortgage interest, property taxes, and depreciation expenses from your income taxes. These deductions can help reduce your tax bill and increase your overall returns. Real estate investors can even take advantage of a 1031 exchange. This allows them to defer paying capital gains tax on the sale of a property if they reinvest the proceeds into a similar property within a certain timeframe. [3]
Real estate can even serve as an inflation hedge, as property values tend to rise with inflation. This means that your investment could help protect you against the rising cost of living in retirement.
For those who are getting closer to retirement, retirement accounts may no longer be a viable option unless you have been working on it for years. Luckily, investors have plenty of other options that can help them reach financial freedom, from the stock market to rental properties.
Understanding the different benefits between 401(k) plans and real estate investments can help investors make smarter decisions for their long-term financial goals.
Multifamily Real Estate Syndication for Retiring Workers
A 401(k) plan is not the only passive source of income that you can rely on if you are approaching retirement. Accredited investors can get into real estate investing without dealing with all the headaches associated with managing a rental property.
With multifamily syndication, you can just enjoy the strong and reliable cash flow without having to become a landlord. No need to take on that big of a responsibility when all you want to do now is relax and enjoy your financial freedom.
Real estate syndication is an investment strategy that involves pooling your resources together with other investors under the guidance of a syndicator. This approach allows you to purchase a real estate property that is too expensive to purchase on your own. [4]
While a syndicator can create a syndication deal with any type of real estate, multifamily syndication is naturally more popular because of its reliable cash flow and the fact that these properties are usually too expensive for a lone investor. With multiple units, apartment complexes and condominiums are able to generate a consistent income through monthly rent. [4]
Multifamily real estate properties do not have to worry as much about vacancies because they can still produce rental income even if one or two tenants leave.
A syndicator puts the deal together and looks for investors who will provide most of the capital needed to purchase the property. Multifamily syndication deals are usually structured as a limited liability company (LLC) or a limited partnership (LP). The syndicator is the general partner while the investors are limited partners. [4]
All syndication deals are different. The investors usually share in the profits and losses of the investment and, depending on the deal structure, a share of the capital appreciation upon resale.
Real estate syndicators handle property management, making this a true passive investment. They will handle the day to day operations of the apartment complex, including rent collection, managing tenants, and dealing with emergencies. Do take note that most multifamily syndication deals are exclusive to accredited investors.
Work with BAM Capital for Multifamily Syndication
Real estate investing has plenty of appealing benefits. But it also takes a lot of work to manage a property you bought. Being a landlord comes with a lot of responsibilities. As someone who is approaching retirement, this may not be ideal for you.
The best way to participate in real estate investing without having to go through all of these challenges is through multifamily syndication.
Work with BAM Capital and they will help you grow your wealth through multifamily syndication. This is an Indianapolis-based syndicator with a strong Midwest focus. They prioritize Class A, A-, and B++ properties with proven upside potential and in-place cash flow. [5]
BAM Capital’s award-winning strategy creates forced appreciation while mitigating investor risk. This syndicator will guide you every step of the way. They will negotiate the purchasing of high quality multifamily real estate, and they will also handle property management. [5]
BAM Capital is also known for its consistent track record. The company now has over $700 million AUM and 5,000+ units, making it one of the best syndicators in the business.
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.
BAM Multifamily Growth & Income
Fund IV
The BAM Multifamily Growth & Income Fund IV, a private real estate fund, seeks to balance cash flow stability, capital preservation, and long-term capital appreciation while providing superior risk-adjusted returns to investors.
Benefits of Multifamily Investing:
- INFLATION HEDGE: ability to raise rents on short-term leases to mitigate rising costs
- TANGIBLE ASSETS WITH CASH FLOW STABILITY: a consistent income stream that is not impacted by the ups and downs of the stock market
- ACCELERATED TAX BENEFITS: performing a cost segregation analysis and accelerating the allowable depreciation can lead to major tax savings
- SUPPLY & DEMAND IMBALANCE: there is not enough housing supply in most US markets to keep up with the demand
- CAPITAL PRESERVATION & APPRECIATION: typically low-risk investments that should produce optimal risk-adjusted returns
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Sources:
[1]: https://www.irs.gov/retirement-plans/401k-plans
[2]: https://www.johnhancock.com/ideas-insights/5-benefits-of-investing-in-401k-plan.html
[3]: https://www.newretirement.com/retirement/8-ways-to-invest-in-real-estate-for-retirement/
[4]: https://www.activedutypassiveincome.com/blog/what-is-multifamily-syndication/
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