401k Real Estate Investment [2023]

Some employers will offer you a 401k retirement savings plan. If offered a 401k plan, you’ll agree to have a percentage of your paycheck paid into an investment account.

Your employer will then match that contribution, either partially or wholly. Then, you’ll be able to choose among different investment options, including a 401k real estate investment.

Your employer will then match that contribution, either partially or wholly. Then, you’ll be able to choose among some investment options.

401k Real Estate Investment
401k Real Estate Investment [2023] 3

We’ve noticed that over the years, 401k plans have become more commonplace among employers and often replace the prospect of a pension. Instead, it’s up to you as the employee to save up for retirement

However, you might be wondering how you can use your 401k plan. Depending on how you use it, you might be able to use it to invest in real estate. What would a 401k real estate investment look like?

We’re here to help you understand the risks, benefits, and disadvantages.

Can You Use 401k To Invest In Real Estate?

Real estate investment with 401k plans is complicated. Specific tax laws prevent anyone from investing directly in their 401k plans. However, that doesn’t mean you can’t purchase an investment by leveraging your plan. 

Taking Out A Loan Against The 401k

You can do this by taking a loan against your 401k. Many plans will permit you to take a loan out against it, but it’s better to consult your 401k administrator first.

So long as you’re allowed to do this, you’ll be able to take half of your 401k’s account value, with a limit of $50,000. You must establish your loan as a bonafide non-recourse one, as collateral will secure it.

The collateral, of course, is the property you’re purchasing. We recommend this, as you’ll find that if your borrower defaults, the 401k admin will seize your property however, they can’t seek further compensation.

Even if the collateral doesn’t cover the total amount that defaulted.

You will need to pay the entire loan within five years of taking it out, and you’ll also have to pay the required interest. However, those interest payments will then be made to your retirement account, meaning that the interest is paid back to you. 

Roll Your Funds Into A Self-Directed IRA

One alternative method to taking out a loan is rolling your 401k funds to a self-directed IRA. While you will still need to consult with your 401k plan’s administrator, they’ll be able to point you in the right direction. 

A self-directed IRA is essentially a type of IRA where you can save for retirement on a tax-advantaged basis. The only difference between self-directed IRAs and others is the type of assets you can put in this account. 

However, a few rules are in place if you go down this route. See, the government would prefer you keep yourself far from your investment.

So, if you purchase real estate with your IRA, you can neither live nor manage the property. If anything, the property title is held by a custodian.

The custodian, naturally, can’t be you. You’ll need to hire a third party to handle any operations with the property, and any revenue generated needs to flow back into the IRA. 

401k Real Estate Investment
401k Real Estate Investment [2023] 4

Benefits Of Real Estate Investment With A 401k

There are several benefits to buying a property with a 401k. For example, buying real estate with a loan is free of tax and free of any penalties.

Any income you generate from the property won’t be taxed. It will instead be put into your 401k plan. While you won’t directly receive the income, you’ll find it will be available in your 401k once you retire.

However, you’ll find there is an exception. See, loans against your 401k don’t have to be your only investment in that property.

For example, you could use the maximum amount of your loan to invest in a property with a down payment of $200,000. You’ll find the property generates around $2000 a month in income.

Your 401k would be able to get $500 each month. If you invest with others, they will also obtain their percentage from the remaining 75%.

Disadvantages Of Real Estate Investment With A 401k

Along with the benefits, there are disadvantages to investing in real estate with either your 401k or your self-directed IRA. We will give you a few examples of what you need to consider before committing to this investment.

First, you’ll need to do a great deal of paperwork and ensure that you meet all of the IRS requirements. You also won’t be an active investor but a passive one.

If you want a more active role in real estate investment, we can’t say that you can achieve that through a 401k.

Instead, you’ll never be involved in the everyday running of your investment. You’ll receive your income once you retire, and you’re allowed minimal involvement. 

You won’t be able to access any of the revenue generated from your property immediately. It’s, therefore, a long-term commitment.

If you don’t repay your 401k loan, you’ll have to pay a 10% penalty for an early withdrawal. So, we recommend that you want to avoid getting taxed for ordinary income. 

Are There Alternatives?

The good news is that you could generate a passive investment through a Real Estate Investment Trust. These are like buying stock and can be traded easily with your retirement accounts.

However, if you don’t have enough cash for a down payment, you could invest in a property with others. You can do this with a self-directed IRA. It will also reduce the risks too.

Final Thoughts

Real estate investments with a 401k plan are complicated and can significantly increase your retirement fund. However, it has drawbacks, and a lot of paperwork is involved.

If you’re interested in investing in real estate, consult your 401k plan administrator. They’ll be able to help you figure out how you can invest successfully.

Hopefully, we have helped you understand how to construct a 401k real estate investment.

Andre Flowers
Andre Flowers

Hello, my name is Andre Flowers and I have been a Licensed Real Estate Professional for over 24 years. I also carry several certifications, including: Certified Distressed Property Expert, Certified Global Business Professional, Certified Credit Repair Specialist.

As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.

Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.

Articles: 179