Should I Invest in my 401K or Real Estate?

401K or Real EstateThere are many people that have a 401K at their work place.  Some companies offer a 401K match.  So people wonder, should they invest in a 401K or Real Estate?   These people want some of the riches of real estate.  They want to purchase a rental property and they want passive income in retirement.  These people want to get rich, and they know many people have gotten rich with real estate.  It is their meal ticket out of their W2 job.

Here are my thoughts in where you should invest your money.  Remember, I am not an investment adviser (but I did stay at a Motel 6 several times).

401K or Real Estate?, Get the Company 401K Match First

If your company provides a 401K match, this is a no-brainer.  Put in the amount that you need to get a 401K match.  Why would you ever forgo an opportunity for free money.  It is like a salary increase without getting one.

My company matched the first 4% of salary, assuming you contributed 4%.  I always contributed the full $24,000 as I was over 50.  It was a bit painful, but I used a 75% of salary contribution rate, and maxed out the 401K by the end of March.

My bonus was a decent one, so I was able to max out my 401K by the end of February one year.  Money in your 401K early is generally better than money in the account later.

If you get an annual bonus, be sure to increase your withholding amount to contribute as much of your bonus money as you can.  You live all year without the bonus, you do not need it now.  Use that bonus to help max out your 401K.

See also

I Quit My Job to be a Landlord

Healthcare Savings Accounts, the hidden gem

The next great opportunity to invest is a Healthcare Savings Account.  Many companies will allow you to contribute to an HSA and the HSA money is never taxed when it goes in.  No FICA tax, no Medicare tax, no income tax.  100% tax free.

When the money is withdrawn, it is 100% tax free, if it is withdrawn to pay medical expenses.  You can contribute money in 2017 and pay for a medical expense in 2099 that occurred in 2017.  Or pay Medicare part B premiums.

You can generally invest HSA money in stocks, and I like a large cap, or S&P 500 fund.  HSAs often have higher investment fees, but they are still the best deal going.  Tax free going in, tax free growth, tax free withdrawals.  It doesn’t get any better.

I always put the full $4,350 in my HSA.

After you get the HSA maxed out, and you get the 401K maximum company match, then continue the contributions to your 401JK until that is maxed out.


Roth IRA

After you max out the HSA and the 401K, put money in a Roth IRA if your income is low enough.  If your income is too high, do a traditional IRA.  Odds are, you cannot do a non-deductible IRA, so you must do an after-tax IRA.  The IRS will track any after tax and pre-tax money via a form 8606, so you should never have to pay tax on money that you already paid tax on.

I always maxed out my Roth, the full $6,500 when I could, and if I could not do a Roth, I contributed $6,500 to a non-deductible IRA.

If you have already maxed out the 401K, maxed out the HSA, and put the maximum amount in a Roth IRA or a pretax IRA, it’s time to invest in real estate – maybe.


Real Estate is Last

Remember, real estate investing is a high-risk, high-reward proposition.  Do not be believe it is easy nor risk free.  There are ways to mitigate the risk, but it is still incredibly risky.  It is way riskier that a simple investment in an indexed S&P 500 ETF or fund.

Consider purchasing property in a Roth IRA or an IRA.  That is great money invested, but can be a legal and IRS quagmire.  You need a firm that specializes in real estate investments in an IRA.  There may be some expenses in getting it set up, more than if it is out of an IRA, and then all profits will be tax free.

Remember, I am neither an investment adviser or a tax adviser.  I do not have any licenses for any CFP, CPA or ABC.  Do what you want.


Are you looking to invest in real estate?  Do you already max out the 401K, HSAs and IRAs that are available to you?

9 Replies to “Should I Invest in my 401K or Real Estate?”

  1. Great post, Eric! I have a couple guys at my work who got the real estate bug and have given up on all retirement accounts to focus on it. While it’s great that they’re going at it and doing something good, I just see the missed money slipping through their fingers… especially since we have a company match of about 35% on every dollar invested with no max.

    I’ve been pretty much following your advice. I try to take advantage of what I can first in retirement accounts. It slows down my real estate investing (I’m looking for my third property now), but it seems to make sense to do it that way. I’m glad to see a professional real estate investor confirming my thoughts!


    — Jim

  2. Fully agree with you Eric! There was a brief time where I was very bullish on real estate investments so I stopped contributing to my 403b all together. I’ve since changed my approach and now max out my retirement accounts just as you recommend. I get a 4% company contribution whether I contribute or not. The big thing for me is just automating that good habit of stashing away $346/week for retirement. I don’t know what the future holds, so I’m preparing for anything and playing it safe.

    1. Thank you for reading!

      The stock market, although risky as well, is more a tried and true situation. Especially of you invest in a S&P index, which is a typical 401K option. If you like the greatest fad stock, then it may even be more risky than real estate.

      Stick to a index fund and set and forget.

  3. Another great post from the wise man. This year, I’ll ask to go part time, 3 days a week instead of 5 days a week. I was thinking of backing down my 401k contribution from $18K down to 2%. That way, my paycheck will look as though I’d still be working 4 days instead of 3 days. With my 401K untouch until retirement, I’m “guaranteed” millionaire by the time I turn 67 yo. With my rental income already covered my expenses, I’m still debating that I should leave my contribution to the max. Big decision, but I might go with the latter.

  4. We max out my husband’s 401k and both Roth IRAs, save for kids’ college, but do not invest in my work retirement (no match). It seems like it is very slow saving up for real estate as it is. You are probably right that we should exhaust all tax advantaged options first, but we would really like to someday diversify a little and buy a rent house.

    1. Thank you for reading!

      It is great to diversify, holding an S&P index is a great way. Saving for real estate needs to be done mostly in an after-tax account, that means paying more taxes and having less money to invest.

      Factor in the fact that real estate can be incredibly risky. You may be better off with a hot stock that could go to the moon )or to $0)

Leave a Reply