Rental Property vs. IRA

by Dennis Hartman
Having the benefit of both Social Security payments and a tidy sum in a personal retirement account makes those golden years more probable.

Having the benefit of both Social Security payments and a tidy sum in a personal retirement account makes those golden years more probable.

Saving for retirement is an important and ongoing part of most workers' financial lives. Among the many options are personal investments in rental property and individual retirement accounts (IRAs). Workers can combine these sources of investing with others to ensure they have enough money to retire on schedule, as each option has its own risks and drawbacks.

Making Money

Rental property investments and IRAs can each produce additional money for retirement. Beyond this basic shared function, they are very different investments. An IRA allows a worker to make regular contributions over time, whether from paycheck withholdings or personal contributions. The IRA manager invests that money in a broad range of securities and allows the worker's money to grow along with the economy as a whole. Rental property allows an owner to collect rent from tenants each month, usually funding a mortgage loan on the property and helping the owner build up equity before selling.

IRA Drawbacks

IRAs are relatively safe investments, but they do carry some risk. The major risk of an IRA is that an owner earns low returns and would have been better off investing elsewhere, such as in mutual funds or bonds. Some IRAs have contribution limits, which prevents owners from setting aside additional money for retirement as they can. IRAs also charge penalty fees to owners who withdraw their money early, while rental property owners can sell whenever they like, before or after retiring.

Rental Property Drawbacks

A rental property investment with an eye on retirement income has its own potential drawbacks. Buying rental property is subject to the risks associated with buying real estate. The buyer may get a mortgage loan with a variable interest rate that rises over time. The property itself may lose value if the demand for rental housing in the community falls. Even if the property maintains its value, an owner may have trouble attracting tenants who pay their rent on time. Rental property investors are also responsible for maintenance, property taxes and repairs, which cost time and money even when a rental property is vacant.

Tax Considerations

Both rental property and IRAs can have significant tax effects on their owners. Some IRAs allow owners to contribute money before taxes and only pay tax once they withdraw the money, making it a tax-deferred investment product that saves money. Rental property allows an owner to deduct depreciation of the property, along with improvement costs, from taxable income each year, reducing the owner's tax liability. Rental property may also qualify the owner for a mortgage interest deduction for further federal income tax savings while working and during retirement.

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