Investing with your 401k

4 Replies

We have a decent amount of money in my husband's 401k (around 100k, maybe a little more). My question is, have any of you taken money out of your 401k and taken the tax hit (which I believe is around 25-30%, possibly more) to invest in real estate? We feel that we could get that money working better for us, investing it in some multi-family, say taking out $50k maybe, but that taxed amount is not fun and that is taking a chunk of retirement away. But on the flip side, if you look at the opportunity real investing offers with cash flow, appreciating, tax benefits, etc, we feel there are a lot more positives to it than negatives. Would love any thoughts on those who have done this or something similar and/ or opinions on whether it's a good idea.

Hi @Natalie Wells , your husband can check to see if he can divert some funds to a self-directed 401K. From there you guys could invest in real estate without incurring those high tax penalties. If this option isn't available, the penalties are high to withdraw early so that is really a personal decision. I've done it, but it was a much smaller number.

Hi Natalie -

I am currently in the same boat and looking to do the exact same. The only thing i'd lean towards is taking out a loan on my 401K rather than a withdrawal. That way when im paying back my "loan", im really just refilling my 401k and paying myself back. No penalty or tax paid, property purchased, and once the 401k loan is paid back, i can use the exact same method again to purchase a 2nd.

My only concern is how the banks/lenders see my 401k loan from myself. If i were to use it as my 20% down payment and bank finance the rest 80%, will they look at it as im already in debt to the 401k or accept it as my own personal money?

Interested to hear thoughts on this also.....

@Natalie Wells

@Colin M.

Of course, if you take a distribution from your retirement account you will have to pay the taxes and (likely) penalties.

There are possible alternatives which would allow to you use these funds without paying taxes or penalties.

  • First, you may wish to consider transferring the funds to a self-directed 401k or IRA which will allow you to invest in real estate without incurring taxes or penalties. Please see additional considerations below.
  • If you are eligible to set up a self-employed Solo 401k (or have a 401k plan through an employer which accepts rollover contributions and allows for 401k participant loans), another alternative which would avoid taxes and penalties would be to transfer your funds to such a 401k plan and then take a 401k participant loan. Please see additional considerations below.

Solo 401k vs. Self-directed IRA

If you are self-employed with no w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

  • Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
  • Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

@George Blower Thank you so much for sharing this info. Very helpful. Unfortunately, we did already look into transferring your existing retirement account but the current employer for my husband does not allow that, just like you said, unless he is not working there anymore. This is very helpful all of this information. Definitely worth looking into all options.