I'm just starting to learn about realstate investing. I'm interested in investing in rental properties. I'm wondering if I can take out my 401K to pay for a rental property and avoid the penalties.
If you take a distribution from your 401k before retirement age - you will have to pay taxes and penalties on the amount you take out. There is no way to avoid that.
Alternatively, you could rollover your 401k into self-directed IRA, and then invest in a rental property inside of an IRA. No taxes or penalties if you use this scenario, but you must keep in mind that while you control the investment, you don't own it, your IRA does. You personally can't do any work on the property or benefit from the investment in any way.
@Dmitriy Fomichenko thank for your reply. I recently considered a franchise opportunity whom told me I would be able to use my 401k money. That's I was curious if I can use to buy a realstate also.
It is very common to use self-directed IRA to buy investment real estate, I've done it, many of our clients did so as well.
Buying a franchise using retirement funds would be something very different, because unlike real estate (which is passive) franchise is an active business. Be sure to use professional guidance to stay out of trouble.