investing 401k money

14 Replies

A potential investor asked me today how can she take her 401k money and invest in multi family deal with me? Can she invest that 401k money with me without getting taxed or penalized? She is younger than retirement age.

A licensed CPA, as you claim to be, would know the answer to this question or at least be able to find it from a more credible source.  

@Jason Malabute , yes, if their custodian allows it.

Often "alternative assets" are not part of a typical 401K plan and thus people go with the solo-401k or self-directed IRA for these investments.

Have them talk to their CPA and retirement plan custodian.

And of course, if they are investing into a syndication or fund, then they are purchasing securities that may have other qualifying requirements.

@ Jason - Funny you ask... I had the same question this week! I did some research on the SDIRA company websites (Equity Trust, Advanta, Came Plan) and they all mention Traditional IRA and Roth IRA. Solo 401k seems to be ok as well... However, 401k via company plan (that you are currently working for) is not able to be used for investment. You typically have to direct those funds to the options they have in the plan with the company.

@Greg Kasmer

I am glad you are learning about self-directed options. The Solo 401k is better than ok but you need to be eligible for it. If you are self-employed and do not have any non-owner employees, the Solo 401k offers several benefits over a self-directed IRA.

  • Compared to an IRA, Solo 401k contributions limits are roughly ten times higher
  • There is no custodial requirement for the 401k
  • 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
  • The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage
  • The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)
Originally posted by @Greg Kasmer :

@ Jason - Funny you ask... I had the same question this week! I did some research on the SDIRA company websites (Equity Trust, Advanta, Came Plan) and they all mention Traditional IRA and Roth IRA. Solo 401k seems to be ok as well... However, 401k via company plan (that you are currently working for) is not able to be used for investment. You typically have to direct those funds to the options they have in the plan with the company.

THANKS 

Originally posted by @Justin Windham :

@Greg Kasmer

I am glad you are learning about self-directed options. The Solo 401k is better than ok but you need to be eligible for it. If you are self-employed and do not have any non-owner employees, the Solo 401k offers several benefits over a self-directed IRA.

  • Compared to an IRA, Solo 401k contributions limits are roughly ten times higher
  • There is no custodial requirement for the 401k
  • 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
  • The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage
  • The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)

 THANKS I will review this

@Jason Malabute

I’ve take out three 401k loans over the years. You can only borrow 50k at a time, but it’s better than nothing. Then you have to pay yourself back around 6% interest over five years. This has helped me acquire 3 properties and I have no regrets.

Originally posted by @John Morgan :

@Jason Malabute

I’ve take out three 401k loans over the years. You can only borrow 50k at a time, but it’s better than nothing. Then you have to pay yourself back around 6% interest over five years. This has helped me acquire 3 properties and I have no regrets.

 you were taxed as well right on top of interest?

@Jason Malabute

Silly question, but why does she need to invest her 401k with anyone to get a property?  Have you ever heard of Asset Depletion loans?  Keep your cash.  All you need is a 20% down payment to get started.  High liquidity is used to base the qualifying income to use.  Very simple loans and they work well for purchasing for those with higher net worth.  

E.g. if she has $1MM in her 401k, we'd use a factor of 115% / 84 to determine her monthly income to qualify for a loan.

$1MM x 115% = $1,150,000 

$1,150,000 / 84 = $13,690.47 in monthly asset depletion.

Some lenders use different numbers such as 60 or 128... 

Find a mortgage broker who can help you with this.  Let your and her cash make more money on returns elsewhere or to buy more cash flowing properties.

If you need resource, I can help.

Cheers!

@Justin Windham

The qualifying income is based on the balance in the liquid assets and is lent to the owner of the assets.  Real estate and Cash do not qualify!  Must be some form of retirement, investment, etc... account.  I've done these loans on 401k, Vanguard Mutual Fund accounts, Indexed Whole Life Insurance policies, etc.  These are non recourse loans as the property is the collateral.

$1MM Purchase, 20% Down, 720+ FICO gives a 4.000% interest rate at par, no points.  Minimal docs too.  

You'd need standard stuff - ID, SS card, etc...

For income - Investment statements for last 6 months, 6 months of bank statements to source down payment and closing costs and show reserves on hand. If the borrower has other income like W-2 or even Social Security, they can be combined with the Asset Depletion to give added income. DTI maxes are 50% in most cases.

Terms - Loans are available in 15/30 Fixed, 3/5/7/10 ARMS, and there are Interest Only options as well.  Fully amortized over 30 years. Rate and Term and Cash Out refinancing are also available.  Best rates come with a 3 year Pre-Payment Penalty.  This can be bought down but increases the rate.

Each lender has different thresholds for the Loan Amount as well. The above example is based on less than $1.5MM. LTV will drop if you go higher.

Just some more stuff to think about... Option, options, options... 

Cheers!

Originally posted by @Jason Malabute :
Originally posted by @John Morgan:

@Jason Malabute

I’ve take out three 401k loans over the years. You can only borrow 50k at a time, but it’s better than nothing. Then you have to pay yourself back around 6% interest over five years. This has helped me acquire 3 properties and I have no regrets.

 you were taxed as well right on top of interest?

No, you don’t get taxed to take out 401k loans. You just pay yourself around 6% interest while you pay it back. I’d rather pay myself interest vs a bank! But no taxes to take a loan for your 401k.