When it comes to benefits associated with a traditional job, a retirement plan is one of the most significant. By choosing to invest in a strong retirement plan, you can build your wealth and create a solid financial future. When you look at what your 401k plan can invest in, does it include real estate?
A 401k plan can only invest in real estate if the financial institution organizing your retirement chooses to invest in it. You can only select your 401k investments by moving funds from your company’s retirement into a Roth 401k. However, after some research, you may decide against it.
Real estate is a finicky market, and your retirement is likely the most important investment of your life. If you’re interested in learning more about how you can invest your own money in real estate or any other specific area, read on!
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Is Real Estate a Safe Investment?
Real estate can be a safe investment, but it comes with a variety of risks. The real estate market is challenging to predict, meaning that you can lose money on real estate as quickly as you can earn it. This investment also requires regular upkeep to maintain any value.
According to a recent Gallup poll, thirty-five percent of Americans describe real estate as being their number one preferred investment. Unlike stocks or bonds, real estate has the potential to save you money as it increases in value.
Rather than paying rent, real estate owners can invest in their property.
However, as quickly as real estate can save you money, it can lose it too. Whenever you choose to own rather than rent, you are responsible for any maintenance and repairs.
Between taxes, insurance, leaky roofs, broken air conditioners, plumbing issues, and many more problems, homeowners can find themselves spending far more money maintaining their homes than they might have expected.
A decent rule of thumb is to budget one percent of your home’s value monthly for repairs.
Real Estate As Retirement
When you invest your retirement, you should place your money in safe, slowly growing assets. While real estate may initially seem to fit this description, it may not be the safest place for your money.
For real estate to grow, it must stay in solid condition and a desirable location. Unfortunately for homeowners, it is virtually impossible to assess what location may be hot even just ten years from the date of their purchase.
A now-desirable neighborhood could quickly become riddled with crime a decade down the road. The fantastic school district may have slipped in quality by the time an investor is ready to sell.
The market is too hard to predict.
Furthermore, the stability of the property itself may not be all you first imagined. Homes take large amounts of work to maintain, and it’s all too easy for a hidden problem to develop into a major, foundation-ruining issue.
Another option to purchasing actual real estate property with your retirement funds would be to invest in stocks or ETFs related to real estate rather than the exact property itself. This option allows you to enjoy the market’s steady growth without being subject to many of the same pitfalls.
Can I Invest My Retirement in Real Estate?
Selecting your own retirement investments is tricky, but there are some ways to do it if you want to have that level of control.
You can invest your retirement in real estate only after your money has been transferred into a Roth IRA account. The transfer itself is possible only once you’ve left your current employer or if your traditional 401k plan allows for rollovers.
Let’s take a look at these methods.
Roth vs. Traditional 401k
While a Roth IRA can seem incredibly similar to a traditional 401k account provided by most employers, there are a few key differences.
The most considerable difference between a Roth IRA and a traditional 401k plan is when you pay taxes.
Taxes On a Traditional 401k
On every dollar you earn in the United States, you owe a certain amount of taxes. This percentage is generally calculated based on your income bracket, so if you make a higher amount of money, you will pay a more significant portion of that money back in taxes.
When your money is in a traditional 401k plan, you can place funds into the account before paying any taxes.
The IRS will still deduct a portion of your taxes eventually, but only when you have reached the age you are ready to retire. By this point, you’ll likely be officially out of the workforce, meaning that the money you withdraw will be taxed at the lowest bracket.
Taxes On a Roth 401k
When you choose to place your money in a Roth IRA, the process is reversed. Because you pay upfront taxes, you can know exactly how much is in the account whenever you’re ready to withdraw.
You don’t have to subtract any amount for taxes because those have already been paid.
Another significant difference is that you have the choice of where your money goes in a Roth IRA, meaning that you get the power over how you invest your retirement money. Once you’ve rolled that money over, you are free to invest in stocks, bonds, or real estate, however, you choose.
Rolling Over a 401k
It’s important to note that not every traditional 401k account will allow you to roll funds over into a Roth IRA account while you still work at that employer. Before tying all your hopes in real estate, you should first research and see whether your account will even allow it.
If you’ve already left that employer, however, then you are free to do as you please with your money, whether that means transferring your funds into a Roth IRA account or another employer’s 401k.
Deciding to roll over your 401k is a serious decision, and before making it, you should know the pros and cons.
Pros Of Rolling Over Your Account
By rolling over your account, you can improve your holdings through greater diversification of assets. Whether you wish to invest in stocks, bonds, ETFs, or real estate, the choice is entirely yours to make.
Because this account is entirely yours, you are no longer subject to blackout periods that may affect traditional 401k accounts. In addition, as the sole owner of this fund, you have greater freedom over the beneficiaries of the account.
While a Roth IRA is subject to specific rules, most accounts allow for multiple beneficiaries.
Unlike most traditional 401k accounts, a Roth IRA doesn’t require owners to take money out at any specific time. If you choose to keep working and allow your investments to grow, you are free to do so.
Cons Of Rolling Over Your Account
By rolling your funds over, you may be subject to additional fees. The size of this additional expense varies. Before rolling over your 401k, you should consult a financial advisor about your unique situation to see exactly what this might mean for you.
While a Roth IRA account allows for greater freedom, it also comes at the cost of greater responsibility. Only make this decision if you are prepared for the extra burden of guarding your retirement growth.
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Conclusion
Retirement is the most important investment you’ll make throughout your life. It only makes sense to place a serious amount of thought into how you’ll help that investment grow.
While you can invest your 401k plan in real estate by rolling it into a Roth IRA account, you may find that real estate is only kind to those who accept a great deal of risk. Your retirement is best placed in slow, predictable assets, and real estate may not fit the bill.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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