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
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When the money is withdrawn, it is 100% tax free, if it is withdrawn to pay medical expenses.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?