What Are Better Investments than a 401(k)?

Employees who want an investment option that offers tax benefits and portable savings may consider a 401(k) retirement plan. A 401(k) gives them the opportunity to grow their pre-tax contributions and earnings tax-deferred until they are withdrawn in retirement.

401(k) contributions are typically made on a pre-tax basis, which means that the amount invested in the plan is deducted from the employee’s taxable income for the year. This can lower their tax bill in the short term, allowing them to keep more of their paycheck. A 401(k) essentially offers you a tax break. [1]

Another benefit of a 401(k) is that a lot of employers offer a match on contributions, boosting the employee’s retirement savings and giving them even more incentive to save. Because 401(k) plans are portable, employees can typically roll it over into a new employer’s plan or even an individual retirement account even if they change jobs.

A 401(k) can be a great investment. However, they also have a few disadvantages, including limited investment choices, fees, and withdrawal restrictions. Here we will discuss other investment options that are potentially better than a 401(k).

What is a 401(k)?​

Before we discuss the alternatives, let us take a closer look at 401(k) plans and what they are for. A 401k is a retirement savings plan that is offered by many employers in the United States. It is named after the section of the U.S. Internal Revenue Code that governs it. [2]

With a 401(k), you contribute pretax money from your paycheck. Your contributions are automatically deducted from your pay and invested in the investments you selected from the plan’s options. Employers often match a percentage of your contributions. [2]

The money is automatically deducted from your pay and invested in the investments you choose from the plan’s options. Many employers match a percentage of your contributions, and you benefit from this investment when you retire.

This investment will benefit you once you reach retirement age. It’s important to note that while tax-free withdrawals are possible in certain situations, it’s generally recommended that you avoid withdrawing money from your 401(k) account before retirement, as doing so can significantly reduce the amount of money you have available for retirement.

It’s worth noting that 401(k) plans have income limits. The income limits for contributing to a traditional 401(k) plan depend on several factors, including your age and whether you’re considered a highly compensated employee. For 2023, the maximum amount you can contribute to a 401(k) plan is $20,500 if you’re under age 50, or $27,000 if you’re 50 or older. Contributions to a 401(k) can be revised if your salary or circumstances change. [1]

What are the Disadvantages of a 401(k) Plan?​​

With these benefits in mind, 401(k) plans also have disadvantages and limitations. Investors usually have a limited selection of investment options when they rely on their 401(k) plan. This is because the investment options are chosen by their employer. These options may not align with the individual investor’s goals and risk tolerance.

Your modified adjusted gross income (MAGI) also influences your tax savings. If your MAGI is below a certain threshold, you may be able to deduct your 401(k) contributions from your taxable income. However, if your MAGI exceeds this threshold, you may not be able to take advantage of the tax advantage although you can still contribute to your 401(k).

The threshold for MAGI can vary depending on your tax filing status and other factors, so it’s important to consult with a tax professional to determine your specific MAGI and eligibility for 401(k) contributions, because it affects your retirement savings and the way you pay taxes.

Additionally, 401(k) plans often come with fees, including administrative fees and management fees, which can eat into the investment returns over time. Withdrawals from a 401(k) plan are also generally subject to restrictions and penalties if taken before the age of 59½, which can limit the flexibility of the retirement savings. [1]

Investors may prefer to look into other investment options so they are not entirely relying on their 401(k). So while weighing the advantages and disadvantages of your 401(k) plans, here are some other investment choices for you to consider.

What Are Better Investments than a 401(k)?​​​

For employees whose employers do not offer a 401(k), you may consider opening an individual retirement account (IRA). IRAs are also suitable for small business owners. These accounts offer tax advantages just like 401(k) plans. The tax advantages may differ depending on whether you choose a traditional or Roth IRA. [1]

Some investors choose an IRA in addition to their 401(k). However, the contribution limits on IRA and 401(k) plans differ.

Both investment choices have a penalty for early withdrawal. While there are exceptions to this rule, you generally should not withdraw money from your retirement accounts before you reach 59½ years old.

Traditional IRA vs. Roth IRA​​​​

Traditional IRA and Roth IRA are two types of individual retirement accounts (IRAs) available to individuals in the United States. Both IRAs provide tax advantages for saving for retirement, but there are some key differences between them.

A traditional IRA is a retirement savings account that allows individuals to contribute pre-tax income. Contributions to a traditional IRA are tax-deductible, which means that the money contributed to the account reduces the individual’s taxable income for the year in which the contribution was made. The contributions and any earnings grow tax-deferred until the funds are withdrawn during retirement, at which point they are taxed as income. [3]

A Roth IRA is also a retirement savings account, but with some key differences from a traditional IRA. Contributions to Roth IRAs are made with after-tax income, which means that they are not tax-deductible. However, the funds in a Roth IRA grow tax-free, and withdrawals in retirement are tax-free as well. [3]

Like with a traditional IRA, there are limits on how much can be contributed to a Roth IRA each year based on the individual’s age and income. However, there are no required minimum distributions (RMDs) with a Roth IRA, meaning that there is no requirement to withdraw a certain amount each year after reaching age 72.

In general, the choice between a traditional IRA and a Roth IRA will depend on an individual’s personal financial situation and goals. A traditional IRA may be a better option for those who expect to be in a lower tax bracket during retirement, while a Roth IRA may be more advantageous for those who expect to be in a higher tax bracket in retirement or who want to leave tax-free funds to their heirs.

Health Savings Account​​​​​

A health savings account (HSA) is a type of savings account that allows individuals to save money tax-free for qualified medical expenses. To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP), which is a type of health insurance plan that has a higher deductible than traditional health insurance plans.

Contributions to an HSA can be made by you, your employer, or both, and the contributions are tax-deductible up to certain limits. The funds in an HSA can be used to pay for eligible medical expenses such as deductibles, copays, and prescriptions. Any unused funds in the account can roll over from year to year and continue to grow tax-free.

HSAs can be a great way to save money on healthcare expenses and can also serve as a retirement savings vehicle. However, it’s important to understand the rules and regulations surrounding HSAs before opening one.

Mutual Funds​​

For investors who want an investment option that is not necessarily a retirement fund, they may consider investing in mutual funds. Mutual funds are investment vehicles that pool money from several investors to invest in a diverse portfolio of stocks, bonds, or other assets, managed by a professional portfolio manager or team. This allows investors to expand their portfolio and include securities that they normally could not afford to. [4]

Investors purchase shares in the mutual fund, which represents a portion of the overall portfolio holdings. The value of the shares is determined by the performance of the underlying assets.

Mutual funds offer a convenient way to diversify investments, manage risk, and potentially achieve higher returns than individual securities.

There are many types of mutual funds, including equity funds, bond funds, balanced funds, index funds, sector funds, and more. Each type of fund has a different investment objective and strategy, and investors can choose the ones that best align with their investment goals and risk tolerance. [4]

Mutual funds and 401(k)s are not exactly comparable as they are different types of investment vehicles with different purposes. It is not a matter of one being better than the other, but rather how they can work together to help you achieve your retirement savings goals.

Both mutual funds and 401(k)s can be useful tools in building a diversified investment portfolio, but it’s important to consider your individual circumstances, investment goals, and risk tolerance when deciding how to allocate your assets. You may want to consult with a financial advisor to help you make informed investment decisions.

Best Alternative for a 401K: Multifamily Real Estate Syndication​​​

Speaking of investment vehicles that involve pooling your resources with other investors, multifamily real estate syndication is a good option for investors who are interested in real estate.

In a real estate syndication deal, investors pool their resources together to purchase and operate a large real estate property. Multifamily syndication is when this type of deal is created for an apartment building, a condominium, or any other type of multifamily real estate. While syndication deals can be arranged for any type of real estate, multifamily syndication is the most popular among investors for a number of reasons. [5]

Multifamily properties are large properties that are normally more difficult to obtain for a lone investor because they are generally more expensive than a single-family property. With a syndication deal, investors can participate without having to spend as much money or exposing themselves to a much bigger risk than necessary.

Additionally, multifamily properties have multiple units that can provide a strong and stable cash flow for its investors through monthly rent. Multifamily syndication has the potential for higher returns than traditional investments like stocks and bonds.

A syndicator puts the deal together, locates the real estate property, and looks for accredited investors who will provide most of the capital needed to purchase it. Multifamily syndication deals are usually structured as a limited liability company (LLC) or a limited partnership (LP). In this deal, the syndicator acts as the general sponsor while the investors are limited partners. [5]

The investors share in the profits and losses of the investment. Depending on the specific deal structure, investors get a share of the rental income and capital appreciation when the property is sold. [5]

Multifamily syndication is a passive source of income because the syndicator also takes care of property management once the deal is in place. If you do not want the headache of carrying all the responsibilities of being a landlord, this is the investment for you. Apartment complexes are hard to manage especially if you do not have experience.

Generally speaking, real estate investing gives you a lot more control over your investment because you get to choose what properties to invest in. With a syndication deal, a syndicator does this for you, so it is important to work with a syndicator that is reliable and trustworthy.

Work with BAM Capital for Multifamily Syndication​​​​

Most multifamily syndication deals are exclusive to accredited investors. That said, if you are an accredited investor looking for a good source of passive income in real estate, you need to work with Indianapolis-based syndicator BAM Capital.

BAM Capital has an award-winning investment strategy that allows it to mitigate investor risk and create forced appreciation. With BAM Capital, you can grow your wealth through multifamily syndication.

This syndicator has a strong Midwest focus, prioritizing Class A, A-, and B++ multifamily real estate with in-place cash flow and proven upside potential. [6]

BAM Capital is also vertically integrated, which means they can guide you every step of the way. BAM Capital understands every aspect of putting a real estate syndication deal together. Plus, they have more than enough experience when it comes to acquiring and managing multifamily real estate/

BAM Capital will negotiate the purchasing of high quality multifamily real estate, and they will also handle property management. [6]

BAM Capital’s track record is known for being consistent. They now have over $700 million AUM and 5,000+ units, making them one of the most reliable syndicators out there.

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.