401k plans and real estate are both popular investment vehicles for retirement planning. This article compares the pros and cons of each, specifically looking at using Fidelity 401k plans versus direct real estate investing through a Reddit lens. Key factors like taxes, employer matches, investment options, risk levels, control and more are analyzed to help investors determine which, if either, is better suited for their needs.
Tax advantages favor 401k plans for most
From a tax perspective, 401k plans offer more advantages for the majority of investors. Contributions reduce your taxable income now, investment gains grow tax-deferred, and you only pay ordinary income tax on withdrawals after retiring. With real estate, you miss out on the upfront deduction and have to pay capital gains when selling. However, real estate investors can utilize deductions like depreciation to reduce tax liability.
Employer 401k matches provide free money
If your employer offers a 401k match, this is free money you should take advantage of. Companies will match a percentage of your contributions up to a set limit, averaging around 4-5% nowadays. You can’t replicate this free boost with direct real estate investing. However, savvy real estate investors may beat market returns through leverage and appreciation.
401k investment options simpler and diversified
The investment options in 401k plans offer simplicity and diversification. Target date funds provide an all-in-one set it and forget it approach. Choosing between stocks and bonds within the plan offers passive diversity. With real estate, you take on active selection and concentration risk unless building a large portfolio. But for more advanced investors, real estate provides more control over asset allocation.
In summary, 401k plans provide better tax advantages and employer matches, while real estate investing offers more control and leverage potential. Investors should consider their risk tolerance, desired effort level, tax situation and more to decide which strategy (or combination) works best.