What makes a better investment, retirement accounts or real estate?<\/p>\n
Reasons to Invest in Retirement Accounts<\/h2>\n
Unless you die young in a tragic noodling accident, you\u2019ll probably want to retire one day. Uncle Sam doesn\u2019t want you living in an alley when you do, so the IRS offers some great incentives to encourage retirement savings.<\/p>\n
In 2016, younger adults can invest up to $5,500 in their IRA or related funds like Roth IRAs (for deferred savings on taxes) and SEP-IRAs (for self-employed people). That income is tax-free, deducted from your taxable income (unless you choose the Roth option, in which case your later returns and withdrawals are tax-free instead).<\/p>\n
But IRAs aren\u2019t the only option available. You can also use a 401K or related funds, which have a higher contribution limit of $18,000. If you\u2019re self-employed, it\u2019s harder to set up your own 401K than it is a SEP-IRA, so 401Ks are usually a perk for full-time employees. There are Roth options available for 401Ks as well, if you want to pay taxes now and save on the returns later.<\/p>\n
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Related:<\/strong> How to Use Real Estate to Retire MUCH More Comfortably Than Your 401K Would Allow<\/a><\/em><\/p>\n If you\u2019re really excited about retirement investing, you can invest in both a 401K and an IRA for a combined maximum of $23,500. Above a certain income level, that option phases out, so talk to your accountant if you\u2019re that gung-ho.<\/p>\n Assuming you go the traditional route, rather than Roth, you\u2019re effectively earning an instant return on all money you invest tax-free — saving the 20-40% you would have otherwise lost to taxes.<\/p>\n Best of all, many employers offer matching contributions. They\u2019ll match whatever you contribute to your account up to a percentage of your income. Read: free money.<\/p>\n There are entire books written on this subject. Volumes. Best-selling series, even.<\/p>\n But we\u2019ll do a 30-second lightning-round review of the biggies:<\/p>\n There are many other reasons to invest in real estate, like enforced savings, but to list them would risk this article metastasizing into a tome.<\/p>\n \u201cSo you\u2019re telling me they\u2019re both good? What use is that advice when I\u2019m trying to make a decision here?\u201d<\/em> Glad you asked.<\/p>\n Everyone has their own financial and life goals, and they\u2019re all different. One person might be best off avoiding real estate altogether and maxing out their retirement accounts. Another might become the next celebrity real estate mogul, cigar and mustache included free of charge.<\/p>\n Before you do anything, think long and hard about your long-term financial goals. This inevitably means thinking about your career path as well: Do you intend to work your entire career in a relatively stable sector, like government or healthcare? Or will you ride the winds of fate to see where they blow?<\/p>\n People with long-term careers in stable industries with good benefits usually think more in terms of building a large nest egg. They may not feel compelled to branch into alternative income streams.<\/p>\n Others, like myself, crave financial independence: enough income from investments that you\u2019re no longer dependent on a job to pay your bills. What are your goals? Do you want to go travel the world? Are you tolerant of the risks and labors of being a landlord? Are you interested in putting in the work to become an expert in a real estate niche? Or do you enjoy the stability of working in one career and gradually building a nest egg?<\/p>\n There are no wrong answers, only personal goals.<\/p>\n Who says you can\u2019t have your cake and eat it too?<\/p>\n First of all, you can leverage your retirement accounts in your real estate investing. You can \u201cborrow\u201d money from your 401K, at far lower cost than traditional loans. Or you can invest in real estate as your investment of choice within the retirement account!<\/p>\n To do so, you need a self-directed IRA or 401K with a custodian that allows it. But instead of investing in a specific stock or mutual fund, you can invest in a property. The proceeds still need to be reinvested back in the retirement account, though.<\/p>\n Or go the more conventional route and just put money in both retirement accounts and real estate investments.<\/p>\n Most real estate investors start investing on the side while working a full-time \u201cnormal\u201d job. You can learn the ropes of real estate investing during your off hours, and it\u2019s not so hard to create more time for your investing work while working full-time<\/a>. The more you learn, the lower the risks become in real estate investing.<\/p>\n Unequivocally, you should always, always<\/em> take advantage of employer matching contributions. If your employer will match your 401K contributions up to 5% of your income, invest at least 5% of your income into the 401K. To do otherwise is to turn down a free 5% bonus from your employer.<\/p>\n If you\u2019re reading BiggerPockets, you probably aren\u2019t content with gradually building a nest egg, working into your silver years then flipping the retirement switch.<\/p>\n So find a niche that meets your financial goals! For me, it\u2019s long-term rental properties<\/a>. I want regular, semi-passive income. Perhaps you like the fast-paced action of flipping<\/a>. Or maybe you want a portfolio of vacation rentals around the world. Some people prefer the distance of note investments and hard money lending.<\/p>\n Begin by attending local real estate investing association meetings. Meet other investors. Find a mentor<\/a> and senior partner. Do your first few deals under their guidance, and if you still like them, renegotiate an equal partnership. If not, branch off.<\/p>\nReasons to Invest in Real Estate<\/h2>\n
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<\/p>\nSetting Goals<\/h2>\n
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\nRelated:<\/strong> How to Go From Zero to $8k\/Month in Retirement Income (With No Remaining Debt)<\/a><\/em><\/p>\nDoing It All<\/h2>\n
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<\/p>\nSo Wait, What Should I Do With My Money?<\/h2>\n