In this episode of Coffee with Carl, attorney Carl Zoellner covers the advantages and disadvantages of two of the most popular retirement planning tools: 401ks vs IRAs.


Updated September 21, 2021

Two of the main vehicles for planning for retirement are IRAs vs 401ks. But do you know the differences?

IRAs and 401ks are both used for planning for individual retirement. Both have advantages and disadvantages depending on how you want to use your account.

Contribution limits for 401ks vs IRAs

IRAs and 401ks have vastly different contribution limits. For IRAs, the annual contribution limit is $6,000 a year for individuals. If you’re older, this number may be a little higher if you’re doing catch-up contributions. For 401ks, the annual contribution limit is $56,000 a year for individuals. As you can see, 401ks enable you to supercharge your retirement and contribute much more per year than IRAs.

Usefulness in real estate investing

Additionally, IRAs and 401ks have another major difference. IRAs are subject to unrelated debt-financed income (UDFI) and 401ks are not. What UDFI means is that, if you invest in a project funded by debt, the percentage funded by debt is taxable to your IRA account. With 401ks, UDFI does not apply. This means that you can invest using leverage without worrying that you’ll have to lose a big chunk of your retirement account to taxes.

Risk of loss with prohibited transactions

Another benefit of 401ks for investing is that their risk of loss is lower if you unintentionally engage in a prohibited transaction. With an IRA, one prohibited transaction disqualifies your entire IRA account, meaning that the entire account balance is now subject to taxes and penalties. With a 401k, a prohibited transaction does not risk the entire balance of the 401k account. Instead, a prohibited transaction in a 401k only renders the transaction itself as taxable with penalties.

Since the list of prohibited transactions is quite long and it’s easy to accidentally engage in one, it’s best to work with a qualified tax planning professional when investing with your retirement account.

Watch as Carl covers the benefits of 401ks in real estate investing and compares the benefits and drawbacks of 401ks and IRAs for real estate investing.

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