How to use 401k for investment properties

Question

I am newbie and would like to use my 401k to buy my first property any directions would be greatly appreciated?

Chris Mason · Answer

Typically you can take out a "401k Loan" (borrowing money from, and paying interest to, your future retired self) for the lesser of $50k or 50% of what's in your 401k. That money, and your own other down payment savings if needed, can be paired with a traditional mortgage for the remaining balance of the purchase price. This is fairly standard. Your online portal for your 401k will have a fairly simple process of getting the 401k loan.

If that's not what you're after, can you be more specific with your question?

Tamika Malcolm · Answer

@George Blower thank you so much for the information  very helpful

George Blower · Answer

@Tamika Malcolm

@Chris Mason

Here are the general considerations regarding taking a 401k loan from your current employer plan.

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Alternative: Rollover Funds to A Solo 401k & Take a 401k loan or Invest in Real Estate Directly

• If you are self-employed (i.e. active self-employment earned income separate from your w-2 income) with no full-time w-2 employees, you can set up a Solo 401k and then rollover your 401k funds once you leave your current job [NOTE: You generally can't rollover funds that you saved to your current employer plan until you quit.].
• You could then take a loan of up to 50% of the balance not to exceed $50,000. Please be sure to select a Solo 401k plan provider which allows you to take a loan and will prepare the required 401k loan documents.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
• There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
• Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• As an alternative to taking the loan, you could even purchase the investment property directly using funds in your Solo 401k (assuming you select a Solo 401k plan provider which allows you to invest in real estate). If you don't have enough Solo 401k funds to purchase the property as an all-cash deal, you can combine your Solo 401k funds with non-recourse debt to purchase the investment property. Learn more about non-recourse lenders here: https://www.biggerpockets.com/member-blogs/9552/70408-ira-and-solo-401k-non-recourse-lenders

Tamika Malcolm · Answer

@Chris Mason thank you

Chris Mason · Answer

My understanding is that there are no tax penalties for using a 401k loan.

There is opportunity cost. Once you pull that $50k out, it's no longer working for you to earn an ROI, until such time as you pay it back.

Tamika Malcolm · Answer

@Chris Mason thank you and would this be the way to go to avoid tax penalties  on my 401k?

Tamika Malcolm · Answer

@chris Mason thank you and will this be to go so I dont get tax penalties?

How to use 401k for investment properties

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