Updated: Apr 24, 2022
Tax Deferred Investment
401k provides tax deferred investment, meaning you contribute pretax dollar into account. But when you withdraw, the withdrawal is taxed as your ordinary income. If you plan your investment correctly, then your income will grow even after your retirement. In this case your tax will be the same or more when you withdraw. So, 401k provides an advantage only if your income tax rate at withdrawal is less than your income tax rate during contribution. If you believe that you are financially educated and make saving part of your life, you are better off with Roth 401k or Roth IRA. In case of Roth you contribute post tax dollar into account. What if there is a solution better than 401k and Roth 401k? The solution is rental property investment. Will dive deeper below.
Why & When to choose 401k
When there is a company match for your 401k, then always contribute to 401k up to the percentage matched by your company. Company match is instant 100% return. There is no better investment vehicle than this. Example if company matches 3% always contribute at least 3%.
Why & When to choose Rental Investment
Rental property investment provides great tax advantages. The entire purchase price of your house can be written off as depreciation in 27.5 years. So for example if you buy a rental property for 100k, you can write off approximately 3.6k every year for 27.5 years. Due to this your rental income is reduced due to depreciation and you most likely will not pay income tax. Your property increase in value over time, but there is no tax until you sell.
Historically speaking, there have been more success stories in the investment of Rental Properties than in the 401k. Any investment comes with its own risk and some choose to invest in both to diversify their income and risk factors. The choice of investments depend on various factors depending on the choices of an individual, Financial situations, long term visions and goals of an individual, risk factors that are able to be handled. Every situation is unique.