How to use my 401k to buy real estate

3 Replies

I Have roughly 80k in a retirement fund from a former employer.  I would like to use this money to fund my real estate purchases. I was wondering what is my best option for this? Do I move it to another type of account? Draw it out? Take a loan against it if possible?  I dont know anything about it. I have a new job that gives me a pension and annuity plan so I feel very comfortable using this money to buy homes

Will you be able to outperform your $80k in the market that's 100% passive?  I do not know your age, risk tolerance, etc, but here's what $80k can turn into.

$80k in S&P 500 for 30-years:  https://cutt.ly/nrNzN86

Can you save up real estate funds?  Do you have emergency funds for your personal life and real estate?  Consider everything before pulling your $80k in retirement funds.



@Jessie Randolph

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: https://www.biggerpockets.com/blogs/9552/70408-ira... 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).

Thanks for the reply.  I'm 27. Not afraid of risks. I make 1800 a week right now. Some weeks more but that's always subject to change from job to job.  I'm employed by companies that work for the union so I dont think I could solo 401k. I do have emergency funds. That's why I'd rather use the 401k for my investing and my income for emergency until the units can provide for themselves.   You guys are great I really appreciate the advice.  Great links