Can I take a 401k loan and transfer it to my LLC to purchase a property?

Question

Hi all,I am able to take out a loan against my 401k for up to $50,000 dollars and have to pay it back within 5 years. As far as I understand, this can be used for anything, including an investment property. Can anyone confirm this? My 2nd question is, if the above is true and I withdraw X amount of money, am I able to then transfer that to my LLC and use that to purchase the property through my LLC? This would be the ideal scenario to get that extra layer of protection. I cannot seem to find any definite answers on this. Anything helps, thank you!

Basit Siddiqi · Answer

Yes, you can use the 401K loan towards the purchase of a rental property.

It can be a great idea as fees to take the loan can be low and the interest that is paid, is paid to your retirement account.

It will likely be cheaper than other options that you have.

You can then take the money from the 401K and put it into a business / LLC. Just have a chat with your accountant / lawyer before doing so as you want to properly classify it as a contribution.

Best of luck!

Bill B. · Answer

I don’t know your 401k to LLC question, maybe/probably?

But why not skip the LLC? You’re not really getting any extra protection. Try to imagine a lawsuit that exceeds your insurance coverage. (The only time the LLC would matter.) Where you wouldn’t also be sued personally. You are 10X more likely to be sued for something you do personally. (Dog bite, car accident, pool, injured worker, etc etc.) in which case you’d lose the property anyway as it’s in an LLC you own. It’s your asset.

The call has gone out dozens of times to all the BP members for one example where an LLC saved them that an umbrella policy wouldn’t have. There have been zero examples. And that’s all assuming your the first person in history to perfectly separate their personal and corporate life to prevent piercing of the corporate veil when a lawsuit involving more losses than insurance coverages.

Raise your standard limits and if you’re worth more than $500k-$1m just raise the limits on the umbrella policy you obviously already have. If not, you’re “judgement proof” by lack of assets. Good luck and done let this prevent you from moving forward.

Anthony Greco · Answer

Thanks everyone for the replies. That is very helpful. For further context, I will be using a hard money lender who funds 80% of purchase price and 80% of rehab costs, so ideally if everything goes according to plan I will do the BRRRR method and be able to refinance in 3-6 months. I will pay off the hard money lender and use the rest of the equity to pay back my 401k loan so I shouldn’t lose too much of growth from it.

Dmitriy Fomichenko · Answer

@Anthony Greco,

If your 401(k) plan allows participant loans, you can use the loan proceeds for any purpose; there are no restrictions. You could use proceeds to buy a boat (that would be foolish but permissible), or you could use proceeds to buy an investment property directly in your name or the name of the LLC, or (if you feel generous) you could gift $50,000 to me. Regardless of how you use the loan proceeds, YOU must pay the loan back.

Of course, I'm being sarcastic here, but I'm trying to make the point that there are no restrictions on how loan proceeds can be used.

Nicholas L. · Answer

@Anthony Greco

just note that, to do this, you will have to have an absolute slam dunk / perfect BRRRR where you are able to pay back absolutely everything.  this is very, very difficult.  i am under contract right now on a property in the Pittsburgh area that I am going to BRRRR, and if it goes perfectly I calculated i'll still have between 2k and 12k left in it.

as you probably know there are fees on top of the loans so what you're doing is a very expensive way to borrow money.

so i am hoping you have a good amount of actual liquid cash available on top of the 401K loan...

there's so much cheerleading going on in this thread it's wild, very little talk about the risks here.

hope this helps...

Ashley Price · Answer

I'd advise getting a personal unsecured loan as long as you have the income and credit profile I can fund you.

Syed Ahmed · Answer

You can generally use a 401k loan for any purpose, but it’s technically you borrowing from yourself, so the money first comes to you personally. Once in your account, you could contribute or loan it to your LLC, but you’ll want to be careful with documentation and tax implications. It’s also worth noting that repayment terms are strict, and if you leave your job the balance may be due quickly. I work with a lending company and sometimes see people compare this route to other short-term funding options, just to weigh risk against return. Feel free to connect if you want to talk through funding structures I’ve seen work for similar purchases.

Ashish Acharya · Answer

You can usually take a 401(k) loan for up to $50,000 or 50% of your vested balance, whichever is less, and use it for almost anything, even an investment property, if your plan allows it. The IRS does not limit what you can do with the money, but your employer’s plan might.

Repayment is usually five years through payroll deductions, and it is not taxable if you stay on track. The big watch out is if you leave your job or miss payments, because then it turns into a withdrawal with taxes and possibly a 10% penalty. Also remember you are paying it back with after-tax dollars and losing whatever returns you might have gotten if it stayed invested.

• Check your plan rules and get written confirmation before doing anything

• Be aware that job loss or default can get expensive fast

If your plan gives the green light, you can move the money into your LLC and have the LLC buy the property. Just document the transfer either as a capital contribution or a loan to the LLC, and make sure the property is titled in the LLC’s name.

Keep business and personal money completely separate so your liability protection holds up. And even though the LLC owns the property, you are still personally responsible for the 401(k) loan, so run the numbers to make sure the returns justify the risk.

• Keep personal and LLC finances separate at all times

• Make sure the deal’s ROI beats the cost and risk of borrowing from retirement

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Dmitriy Fomichenko · Answer

@Anthony Greco, sounds like a good plan!

Aaron Zimmerman · Answer

Question #1: correct

question 2; I don't see why you couldn't do that. I'd look to work with a cpa to make sure it's scheduled the right way

Can I take a 401k loan and transfer it to my LLC to purchase a property?

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