How can you put your 401 K to work

Question

Hello BP Family

Can please someone explain me. If you would like to use the money saved up in your 401K. to buy a buy and hold how does that work?

Any help will be greatly appreciated.

Thanks

Bianca

Justin Windham · Answer

@Keith Meyer

The Solo 401k is the preferred structure compared to an IRA for those who are eligible. As others have mentioned, UBIT is assessed on equity investments into an active trade or business whether you have an IRA or 401k. The Solo 401k is exempt from UDFI on real assets, however.

A few other benefits:

Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.

There is no custodial requirement for the 401k.

You can take participant loans from the plan.

You don't need the additional expense and administration of an LLC to have checkbook control.

There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.

A spouse can also participate in the same Solo 401k plan.

Solo 401k plans are often quicker to setup and cost less money over time compared to most IRA LLCs.

Brian Eastman · Answer

@Keith Meyer

A former employer 401k plan could not be invested into real estate, as that plan administrator will not have the correct business model/services to do so.  You can, however, rollover that plan to a self-directed IRA or Solo 401k that would give you the possibility to invest in real estate.

Which plan will be best for you hinges on a lot of factors, starting with whether you even qualify for the Solo 401(k).  Such plans are true employer-sponsored plans (not individual accounts), and require a business to sponsor the plan.  You need to have some form of ongoing self-employment and no full time employees.

If leverage will be used to acquire rental property, the Solo 401(k) is exempted from the tax on Unrelated Debt Financed Income (UDFI) that an IRA would have exposure to.  The tax itself is generally quite minimal, so the biggest benefit is avoiding the headache of the filing itself.

There is no exemption for Unrelated Business Taxable Income (UBTI) afforded by the Solo 401(k).  That tax applies when a tax-exempt entity engages in a trade or business (i.e. flipping houses) on a regular basis.  Rental income is passive and not subject to UBIT in either an IRA or 401k.

There is a lot of good information here on BP on these topics.  There are also several providers of such plans who participate actively on the forums.  Read up a bit, but don't overdo it.  Get on the phone and speak with a professional who can quickly point you in the direction that will be the best fit for your specific situation and goals,

Dmitriy Fomichenko · Answer

@Keith Meyer,

In order to invest in real estate using your retirement funds you need "self-directed" IRA or 401k. Your former employer 401k is not "self-directed", therefore you first would have to convert it into account which would allow you alternative investments.

Yes, there is no UBIT on leveraged real estate with the 401k. However, truly self-directed Solo 401k is not for everyone, you must be self-employed or have legitimate business that generates earned income to qualify.

George Blower · Answer

@Keith Meyer

• If the property is buy and hold then UDFI does not apply, whether done under an IRA or a solo 401k plan.

https://www.irs.gov/irm/part7/irm_07-027-008

• If done under an IRA and a non-recourse loan is incorporated, UDFI does apply.

• If done under a solo 401k plan and a non-recourse loan is incorporated, UDFI does NOT apply.

Keith Meyer · Answer

@Dmitriy Fomichenko & @Brian Eastman

Thank you very much for the prompt, informative responses. EXACTLY the information/clarification I was looking for. This is why I love BP!

Keith Meyer · Answer

I've searched the forums for clarification on this, but haven't been able to find. Two questions:

1. It seems more advantageous to use a 401k vs an IRA to buy real estate. Can a former employer 401k (not sure the official term for this) be used? Or would it have to be converted to a Solo 401k or Self Directed IRA first?

2. I've heard 401k's avoid the UDFI when leverage is used. Is this true? Can you also avoid UBDI? What would be the disadvantages of using a 401k to acquire a Buy and Hold rental property?

Thanks!

Bernard Reisz · Answer

@Bianca Gandhi When choosing between self- directed IRA or 401k, be aware that the solo 401k is a better vehicle for RE investing. Using leverage in an IRA may result in taxable income, but will not result in taxable income to a Solo 401k. The tax being referred to is known as UDFI, short for Unrelated Debt Financed Income.

Bianca G. · Answer

Thank you so much Shaun Weekes and Shaun R. I appreciate the feedback. I will definitely look into it.

Thanks Again!

Shaun Weekes · Answer

If your 401K is with a current employer just call your HR department and find out how to obtain the "terms of withdrawal" as this will outline how much you can take, what percentage and how many loans.  It will also outline reasons that are acceptable for withdrawal.  Like a home purchase or family emergency or whatever.  If it's an old 401K, you can pretty much do with it as you please.

I hope this helps and have a great day.

How can you put your 401 K to work

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