What to Do Instead of 401k for Highly Compensated Employees
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With a 401(k) plan, employees have the opportunity to grow their pre-tax contributions and earnings tax-deferred until they are withdrawn in retirement. Most employers offer a match on contributions, which gives workers even more incentive to save. This makes 401(k) a great investment.
However, not all employees have access to this opportunity. According to the American Retirement Association, over 5 million employers in the US did not offer a workplace retirement savings benefit.
Here we will discuss what a 401(k) is and why highly compensated employees should consider looking for an alternative.
What is a 401(k)?
A 401(k) is a retirement savings plan that is offered by employers to their employees. It is named after the section of the U.S. Internal Revenue Code that governs it. [1]
With a 401(k), employees can contribute a portion of their pre-tax income to the plan, which is then invested in a range of investment options such as stocks, bonds, mutual funds, or target-date funds. The contributions and any investment earnings in the plan grow tax-deferred until the money is withdrawn, when it becomes subject to income tax.
Employers can also choose to make contributions to their employees’ 401(k) accounts, either as a matching contribution or as a profit-sharing contribution. Many employers offer matching contributions, in which they match a percentage of the employee’s contributions up to a certain limit. For example, an employer might match 50% of an employee’s contributions up to 6% of their salary. [1]
401(k) plans are a popular way for people to save for retirement because they provide tax benefits and often have employer contributions. However, there are limits to how much employees can contribute each year, and there may be fees associated with the plan.
Why Highly Compensated Employees Need an Alternative to 401(k)
Highly Compensated Employees or HCEs often have unique financial circumstances that make it challenging for them to rely solely on a traditional 401(k) retirement plan.
For example, there are contribution limits that HCEs need to consider. In 2022, the maximum annual 401(k) contribution limit was $20,500, with an additional $6,500 catch-up contribution allowed for those over age 50.
However, due to their higher income, a highly compensated employee may hit the annual contribution limit quickly, leaving them unable to save as much as they would like for retirement.
Additionally, HCEs may prefer more flexibility and control over their investments, especially if they have a high risk tolerance or desire to invest in alternative assets. In fact, some HCEs may also want to diversify their retirement savings to minimize taxes in retirement. This could mean using a Roth 401(k), a non-deductible traditional IRA, or another tax-efficient investment vehicle, which we will explore later on.
Despite its benefits, 401(k) plans also have a few drawbacks. For example, 401(k) plans may come with fees and expenses, such as administrative fees and investment fees, which can eat into investment returns over time.
Since 401k plans are tax-deferred, individuals also pay taxes on their withdrawals during retirement. This can impact their overall retirement income. Plus, if you withdraw funds from your 401(k) before age 59 1/2, you may be subject to a 10% penalty on top of ordinary income taxes.
401k plans are also managed by an employer or a third-party administrator, which means the individual has limited control over their investment choices.
So while 401(k) plans offer a range of investment options, highly compensated employees may still want to consider other options.
Potential 401(k) Alternatives to Consider for Accredited Investors
A Traditional IRA (Individual Retirement Account) is a type of retirement account that allows individuals to save for their retirement with tax-deferred growth. This means that you won’t have to pay taxes on the money you contribute to the account or the interest and investment gains you earn until you withdraw it during your retirement. [2]
Just like a 401(k), this type of retirement account has its own unique advantages. A traditional IRA is available to anyone who meets the eligibility requirements, while a 401k is only available to employees of companies that offer the plan.
A traditional IRA may appeal more to investors because it offers a wider range of investment options than a 401k, since the latter is limited to the investment options offered by the plan. Additionally, it also has generally lower fees compared to a 401(k), since the latter may charge administrative and investment fees.
Another option is a Roth IRA. A Roth IRA is another type of individual retirement account that allows you to save after-tax dollars and grow your investments tax-free. This means that any money you contribute to a Roth IRA has already been taxed, so when you withdraw the funds in retirement, you won’t have to pay taxes on the contributions or the earnings. [2]
The key difference between a Roth IRA and a traditional IRA is that it allows you to grow your money tax-free. You will be able to withdraw your money at retirement completely tax-free. However, this means your contributions have to be made on an after-tax basis. As an investor, you do not get any tax savings from the Roth IRA until you retire. Roth IRA gives you tax-free growth at retirement. [2]
Aside from salary deferrals you may also invest in a Health Savings Account (HSA). Health savings accounts are not just for health care, despite the fact that they were made to help Americans pay for their care.
HSAs are only available to individuals who have a high-deductible health plan (HDHP). It allows them to save money on a tax-free basis to pay for current or future medical expenses. [2]
One of the key benefits of an HSA is that contributions to the account are tax-deductible, which means that individuals can reduce their taxable income by contributing to an HSA. Additionally, the money in an HSA grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
This can result in significant tax savings for individuals who use an HSA to pay for their medical expenses. The real benefit of HSA occurs once you hit age 65. This is when you can avoid the 20 percent penalty for non-medical uses of the plan even though those withdrawals and expenses are considered taxable income.
Best Alternative for a 401K? Consider Multifamily Real Estate Syndication
A 401(k) can be considered an employer-sponsored retirement plan. But if you are looking for an even better alternative, you should look into real estate investing.
Real estate investing gives you a lot more control over your investment because you get to choose what properties to invest in. Real estate investors can make their own purchase decisions without relying on their employer.
Highly compensated employees in particular should consider multifamily real estate syndication. Multifamily syndication can be a good alternative to a 401(k) depending on your financial goals.
Real estate syndication involves pooling money with other investors to purchase and operate a large apartment building or complex. The investors share in the profits and losses of the investment, typically in the form of rental income and capital appreciation when the property is sold. This depends on the specific deal structure as all syndication deals are different. [3]
The benefits of multifamily syndication include the potential for higher returns than traditional investments like stocks and bonds, as well as the ability to invest in tangible real estate assets that provide cash flow.
Because of their potential to generate strong and consistent cash flow through rental income, multifamily syndication is the most popular version even though syndication deals can be done for any type of real estate.
Real estate syndication deals are usually structured as a limited liability company (LLC) or a limited partnership (LP). The syndicator locates the investment property, creates the LLC or LP, and finds investors who will provide most of the capital needed to purchase the real estate. In this deal, the syndicator acts as the general sponsor while the investors are limited partners. [3]
The syndicator is in charge of putting the deal together and also managing the property once the syndication is in place. This means the syndication deal is a passive investment. Investors do not have to play the role of landlord or carry any of the responsibilities associated with owning a large multifamily real estate property.
Syndication deals give investors the opportunity to participate in large and complex projects that are usually too difficult to undertake for a lone investor. For example, multifamily buildings such as apartment complexes are usually too expensive and too difficult to manage if you are doing it on your own. However, by pooling resources with other real estate investors, you can enjoy a much safer investment that generates passive income. This opens up a world of possibilities for investors. [3]
Whether multifamily syndication is a good alternative to a 401(k) depends on a number of factors, such as the individual’s investment goals, risk tolerance, and overall financial situation. It’s important to do your research and consult with a financial advisor before making any investment decisions.
Work with BAM Capital for Multifamily Syndication
As an investor, you need to weigh your options. A highly compensated employee may be able to invest in both multifamily syndication and a 401(k) plan, which will allow them to enjoy the benefits of both.
Most syndication deals are exclusive to accredited investors. Accredited investors are defined by the Securities and Exchange Commission (SEC) as individuals or entities that meet certain criteria that prove their financial sophistication and knowledge. With their net worth, annual income, and credentials, they are allowed by the SEC to invest in securities that are not registered with financial regulators.
Accredited investors who want to make the most out of multifamily syndication should work with the best syndicator. Work with BAM Capital.
BAM Capital is an Indianapolis-based syndicator that prioritizes Class A, A-, and B++ multifamily real estate in the Midwest. BAM Capital focuses on properties with proven upside potential and in-place cash flow. [4]
Thanks to its award-winning investment strategy, BAM Capital can mitigate investor risk while creating forced appreciation, helping them grow their wealth through real estate syndication.
BAM Capital will guide you every step of the way. This syndicator has more than enough experience in terms of acquiring and managing multifamily real estate. This vertically-integrated syndicator can handle everything from start to finish. They can negotiate the purchasing of high quality multifamily real estate, and they can also handle property management. [4]
BAM Capital even has its own construction team that covers renovations and repairs, through BAM Construction.
BAM Capital is best known for its consistent track record. In fact, the syndicator now has over $700 million AUM and 5,000+ units, making it one of the most reliable syndicators out there. [4]
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.
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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source https://capital.thebamcompanies.com/2023/04/what-to-do-instead-of-401k-highly-compensated-employees/
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