401(k) Vs Real Estate Vs IRA


Whether or not you are an active investor, you likely value the idea of having a plan in place for retirement. In order to ensure you have a sound retirement strategy in place, it’s important to review and compare multiple investment opportunities. In addition to the wildly popular 401(k), which most people are granted access to through their jobs and careers, those looking to retire comfortably have at least two more options at their disposal: real estate investing and an individual retirement account (IRA).

Real estate investing, IRAs and 401(k)s have all been helping people retire comfortably since their respective introductions into society. It is worth noting, however, that while each of these retirement vehicles has the same objective, the means by which they go about doing so is uniquely different. Continue reading to answer any questions you may have on the 401(k) Vs real estate Vs IRA debate.

401(k) Vs IRA

In their simplest form, 401(k)s and IRAs are effective retirement savings vehicles. However, while each is intended to pad one’s own retirement savings, they go about doing so in different ways. In fact, the differences between the two are significant enough to warrant a discussion. Therefore, instead of sparking a 401(k) Vs IRA debate, let’s first clarify what differentiates these two retirement plans from each other.

For starters, 401(k)s are only offered through employers, whereas any individual is free to open a Roth IRA or traditional IRA. In other words, anyone can open an IRA, but to gain access to a 401(k), one must be offered the plan through their employer.

In addition to who they are offered to, 401(k)s and IRAs also differ in another significant area: their investment options. Since IRA accounts are typically held by custodians, not unlike a bank or brokerage, it’s quite common for them to award their account holders with the opportunity to own many different assets, including stocks, bonds, Certificates of Deposit (CDs) and even real estate. Conversely, 401(k)s are slightly more limited in their offerings, primarily allowing their account holders to invest in mutual funds specifically tailored to their risk tolerance.

The differences between 401(k)s and IRAs aren’t only noticeable in their investment options, but also in the way they are viewed by The Federal Government of the United States. More specifically, money contributed to either of these accounts is taxed differently. Contributions made to a 401(k), for example, are tax deductible, regardless of how much money the investor makes.

Not unlike a 401(k), contributions made to an IRA are also tax deductible, but with a simple caveat: IRA contributions are tax deductible only if the investor’s modified adjustable gross income (MAGI) is under a certain amount. As contributions approach the predetermined limit, the amount investors may deduct are proportionately decreased. Roth IRA contributions, on the other hand, are not tax deductible, but the money in the account is permitted to grow tax free.

The final component that differentiates 401(k)s from their IRA counterparts is the amount one may contribute to their respective retirement plan. Contributors to IRAs are much more limited than those with a 401(k). According to the IRS, contributions made to a 401(k) by investors under the age of 50 can’t exceed $18,500 (in 2019 the contribution limit will increase to $19,000). Those who are 51 or older can add an extra $6,000 to the amount, for a total of $24,500 each year. Individual retirement account contributions, on the other hand, may not exceed $5,500 for those under the age of 50 (in 2019 the contribution limit will increase to $6,000). An extra $1,000 may be contributed to the IRAs of those over 50.

Regardless of their differences, both IRAs and 401(k)s are great options for tax-advantaged retirement saving. Which one works better for you, however, will ultimately depend on your own goals.

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IRA investment

Benefits Of A Retirement Savings Account

Aside from promoting a legitimate means of saving for retirement, retirement savings accounts award their holders several more benefits. For a better idea of what else you can expect from opening a retirement savings account of your own, please refer to the following benefits:

  • Tax Benefits: As I have already alluded to, the single greatest benefit of opening a retirement savings account is the ability to deduct contributions from your taxable income. The money put into the retirement account isn’t factored into your income when the IRS calculates your taxable income, and therefore lowers your taxable obligations.
  • Employer Matching: Select 401(k) plans (doesn’t include IRAs) offer employer matching. As their names suggest, matching plans will witness the employer contribute just as much money as the employee to their respective 401(k) (up to a certain percent). Employer matching is essentially free money, as the employer will make contributions to your own 401(k).
  • Self Direction: Often overlooked, but nonetheless an incredible benefit, most retirement accounts allow their holders to self direct their savings into subsequent investment vehicles. Those who self direct their retirement vehicles are allowed to exercise more options. In doing so, prospective retirees are awarded much more than a simple list of stock options recommended by their employer; they can choose from several less-than-traditional retirement vehicles, not the least of which is real estate.

Benefits Of Real Estate

The benefits of real estate investing are well documented and sought out by many. However, few may be familiar with all of the benefits this industry has to offer. Investing in real estate has become synonymous with more than just collecting rent and rehab checks. Here are some of the most popular benefits that are currently associated with investing in real estate:

  • Income: The income potential for properly vetted real estate investments is, without a doubt, the greatest benefit of woking in the housing sector. However, the passive nature of rental properties makes the prospect of income even more attractive. Good rental properties can produce passive income well into retirement. Whereas retirement accounts bank on a limited amount of savings, rental properties can continue to produce new income each and every month they remain in operation.
  • Depreciation: Qualifying rental property owners are allowed to write off a portion of the original purchase price each year over what has been deemed by the I.R.S. to be the “useful life” of a property (typically 27.5 years). Not unlike a business expense, homeowners renting out their property can claim a significant deduction each year for nearly three decades.
  • Appreciation: While appreciation is never guaranteed, history has taught us that home values will increase more often than not. For the better part of a decade (from January 2012 to today), the median home value in the United States increased exponentially, and now sits at $221,500, according to Zillow. As a result, homeowners can usually count on their assets increasing in value.
  • Equity: Every payment made towards a home loan increases the equity in a property, which essentially increases a homeowner’s bottomline. The more equity one has in a home, the more they will be able to accumulate wealth and mitigate debt.
  • Leverage: In real estate, buyers have the ability to leverage other people’s money. Instead of using their own savings and tapping all of their own funds, investors may leverage funds from other sources to acquire properties that are worth more than the amount of available funds they currently have. A $20,000 loan may allow an investor to acquire a $100,000 property, essentially maximizing one’s cash-on-cash return.
  • Taxes: While the tax advantages of retirement accounts are well known, there’s more to get excited about with the tax benefits that coincide with owning real estate. Rental property depreciation and the mortgage interest tax deductions alone can amount to thousands of dollars each year, and can actually act as a tax shelter for owners’ hard-earned money.

How To Use A Retirement Savings Account To Invest In Real Estate

If you are already investing in a retirement account, but would rather put the money you have managed to save into real estate, the IRS will allow you to do so. It is entirely possible to self direct your individual retirement accounts into real estate assets, but not without addressing a few critical changes that need to be made. For starters, your IRA or 401(k) must be in the hands of a custodian that will allow you to facilitate real estate investments.

Those currently contributing to a 401(k) will have to wait until they stop working with their current employer before they can switch custodians. However, upon your departure you’ll be award the opportunity to transfer your retirement account to a custodian that will happily allow you to self direct your hard-earned money. Individual retirement accounts will also need to be structured in a way that allow them to be self directed. More often than not, doing so is as simple as switching to a custodian that will allow you to invest in real estate. Be sure to contact a retirement account custodian who specializes in setting up self-directed accounts, as they will be more likely to inform you of the necessary steps to take in order to move your funds from the old account to the new one.

Once your funds are in a self-directed account, you are free to invest them in real estate. It is worth noting, however, that self-directed accounts are still meant for retirement; profits made from real estate investments that are returned to the account are tax deferred.


Both IRAs and 401(k)s are great ways to save for retirement. The tax deductible contributions each offers its contributors is an amazing opportunity. However, those looking to take advantage of more income producing investments than stocks and bonds may want to consider self directing their own retirement accounts into real estate. If for nothing else, real estate offers more potential and more benefits than traditional retirement accounts. If you don’t want to leave an opportunity on the table, now maybe the time to settle the 401(k) vs real estate debate and consider self directing your own retirement account into a rental or a rehab.

Key Takeaways

  • There are many great ways to save for retirement, which begs the question: Should I put money in a 401(k) or real estate?
  • 401(k) or property investment are two great ways to save for retirement, but the best one for you is ultimately the one that meets all of your goals.