When planning for the future, especially early retirement, it's important to understand where to best invest your money. In one of his recent episodes of his podcast, financial expert Suze His Orman shared his thoughts on whether it's better to invest in retirement accounts or real estate. Here's what she said and how you can apply her advice.
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Why put money in a retirement account?
Orman believes retirement accounts should be an important part of everyone's savings plan. In response to a question from a listener named Sabrina, she explained that putting more money into her employer-sponsored retirement plan and Roth IRA is a smart choice. These accounts have high contribution limits, with a 401(k) limit of $23,000 in 2024, allowing people to save large sums of money in a tax-friendly way. Masu.
Orman says one of the biggest perks of Roth IRAs is that the money you earn from investing in these accounts isn't taxed when you withdraw it in retirement. This is a great benefit for those who think they may be subject to higher taxes in the future. This means you won't have to worry about paying extra taxes in retirement and will have more money in your pocket.
Orman's advice is especially helpful for people like Sabrina who want to retire by age 55. She emphasized the importance of saving aggressively and choosing your investments carefully.
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401(k) matching
A 401(k) match is when your employer adds funds to your retirement plan based on your contributions. For example, if your annual income is $50,000 and she contributes $3,000 each year, he will match all contributions up to 6% of your salary, and he will also contribute $3,000. In some cases, there may be rules about how long you have to work there before you can keep this extra money if you quit.
How Roth IRAs work
A Roth IRA is a type of retirement savings account with unique tax benefits. Unlike a traditional IRA, where you get a tax deduction on your contributions, with a Roth IRA, you pay taxes when you put the money in. The big benefits come later. When you withdraw your funds at retirement, you don't pay taxes. You don't have to pay taxes even on the earnings or interest accumulated over the years.
What about real estate investment?
Orman is more cautious when it comes to real estate. She acknowledged that while you can make a lot of money, it comes with challenges and costs that don't exist in retirement accounts. Real estate requires continuous investment not only to purchase but also to maintain. Expenses such as insurance, property taxes, and maintenance costs can increase, putting pressure on profits. Additionally, selling real estate takes time and may not always be easy depending on market conditions.
During the podcast, Orman suggested Sabrina consider other ways to earn passive income, such as investing in the stock market or putting money in a high-yield savings account. These options are simpler and don't require ongoing expenses like real estate.
Investment accounts and real estate: pros and cons
There are many benefits to putting money in a retirement account, including free money, including tax breaks and the possibility that your employer will match a portion of your contributions. However, these accounts typically have rules about when you can withdraw money without penalty, which may not work for people who want to retire early.
On the other hand, you can earn stable income by renting real estate. This can be an attractive option for covering your retirement expenses without having to sell your investments. However, being a landlord comes with its own responsibilities and risks.
final take
Orman emphasized the importance of understanding investing. Knowing how different investments work can help you choose the right investments for your financial goals. She encouraged everyone to learn the ins and outs of stocks, bonds, real estate, and retirement accounts to build a diversified portfolio. This helps protect your money from market ups and downs.
It's always a good idea to consult a financial advisor who can help you apply these strategies to your financial situation. They provide personalized advice to ensure that your investment choices suit your financial goals and personal risk tolerance.
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This article originally appeared on GOBankingRates.com: About retirement planning and real estate investing with Suze Orman
