Should I Invest in Real Estate or a 401(k)?

Image courtesy of Graur Razvan Ionut at

Image courtesy of Graur Razvan Ionut at


In the old days, Americans would go work for a company for their entire career. Part of the perks, alongside a steady paycheck and job security, was a pension. However, pensions are now a thing of the past for most of us. Instead, we are responsible for our own retirement savings. What is the best way to manage that money?

What is a 401(k)?

A 401(k) is a tax advantaged investment account designed to be the primary replacement for pensions. Rather than an employer defining a fixed payout at retirement, called a defined benefit plan, employees now contribute a portion of their paychecks into a 401(k) account with some level of matching from their employer. This is a defined contribution plan, not a defined benefit plan.

401(k) plans are tied to your employer, and your employer chooses an investment company with different investment options for your funds. You have access to just a few funds, or an entire fund family from a company like Vanguard or Fidelity.

As long as you keep your job, you are limited to only those funds, you cannot move them into anything else, including real estate. You can lower your contribution, but doing so is giving up free money if you stop getting your match.

When you leave your employer, you can do a 401(k) rollover to a new employer, or rollover the funds to a self-directed IRA account with many, many more investment options including virtually any stock, bond, or fund traded on any major market.

How Can I Invest Retirement Funds in Real Estate?

This question is a complicated one. The short answer is yes, you can invest retirement funds, such as those in an IRA or Roth IRA, in real estate. Unless your employer offers a real estate focused fund, you are not able to invest 401(k) funds in real estate, however.

With an IRA, you do have more flexibility. Here are some easy ways to invest in real estate without doing anything overly complex:

  • Invest in a real estate company stock – You can purchase the stock of a company involved with development, construction, or management of real estate properties.
  • Invest in a real estate fund – You can purchase shares of a mutual fund or ETF dedicated to real estate companies and real estate assets.
  • Invest in a REIT – A REIT, or Real Estate Investment Trust, is an investment vehicle where you invest in a portfolio of real estate properties, which are managed by a third party, and you get a portion of the profits as a dividend payout.

What about Direct Investments in Real Estate?

The laws that created IRA accounts specifically forbid investments in collectibles, certain precious metals, and life insurance. Anything else is fair game, but you have to jump through a few hoops to make it work.

If your current IRA is at a company that does not allow for “self-directed investments,” you may need to move the fund to a company that will allow you to buy and sell other assets in the name of your IRA account.

Once you have the pieces in place, your account could get its own checkbook used for purchasing and investing in real estate assets. However, be meticulous with your record keeping and always keep your retirement fund investments separate from non-tax benefit investments. Your IRA has tax benefits that other investments do not, and if you blur the line you could end up with an audit or a big tax penalty.

When in doubt, work with an experienced financial advisor, accountant, lawyer, or combination to ensure you are doing everything on the up-and-up.

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