401k to purchase vacation rental?

Question

Dmitriy Fomichenko · Answer

Jake,

First of all, the Solo 401k option mentioned above is only available for those who are self-employed or own a small business. If the only source of income for your wife is her employment she would not be eligible for a Solo 401k.

Second, the loan is taken from your 401k (not against it). And given the fact that it is a short term loan the payments on the loan will be high, which is likely to result in a negative cash flow, so probably not the best option.

And lastly, it is possible to buy a vacation rental in an IRA (here is a story about one of my clients doing it in Belize:

http://www.nasdaq.com/article/selfdirected-ira-pla...) but you are absolutely can not use that property for personal benefits.

John Woodrich · Answer

I second everything @Dmitriy Fomichenko says.

Justin Windham · Answer

@Jake Hartman

When you borrow funds from a 401k, those funds are yours to use until the loan is paid back. This means the property will be owned outside of the retirement account. The benefit here is that you can use the property as you wish. The potential downside is that the investment will lack the tax benefits of a Solo 401k or self-directed IRA. Other tax deductions such as appreciate may apply, though. General purpose loans can be taken from a 401k with a maximum term of 5 years. Interest rates are typically around prime +1% (equaling about 5.5% now) and payments are made monthly or quarterly. The principal and interest is paid back to your 401k, so many view this as a benefit compared to loans from a third party.

George Blower · Answer

@Jake Hartman

Also, see the following regarding the 401k participant loan rules.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

Casity Kao · Answer

@Jake Hartman  You can do one of two things.  You can roll it into a Solo 401k and take out a loan up to 50,000 or 50% of the balance of the retirement account whichever is less.  There are certain terms and rates on the loan but then you can turn around and use that for the downpayment and get bank financing.  The other option is if her new employer has a 401k, see if they allow a 401k loan.  You can roll the money in from her past employer into her new employers and takeout a 401k loan which she should be able to takeup a percentage of all her funds she is vested in.  Normally that number is around 50%.  All the funds she contributes to her new employers 401k from the old one she will be fully vested in.  The rates on 401k loans are very low and normally she will pay them directly from her payroll.  If anybody ever tells you no, ask the question a different way.  I prefer to ask how can I?    You can also do non-recourse loan off of a Solo 401k or self directed but this is not an ideal option as you lose tax benefits.

401k to purchase vacation rental?

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