Using my 401k to purchase real estate? Who to contact?

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Using my 401k to purchase real estate? Who to contact?

Christopher Reynolds
Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes

Hello everyone! I have a 401k with a company I work for. Although my career used to be with this company, I have started a contracting business in the last few years. However, I am still employed by this company on a part time basis.

I have learned of a tactic where you can take a loan out (not closing the account) against the 401k funds. You can use the funds for whatever you wish, but why would you want to purchase a non-performing asset?! :) You even pay yourself interest, as you act as your own bank. I contacted my loan servicing company, and they said my employer does not allow loan distributions from their plans.

If I left my employer, would I be able to start a new 401k account with another servicing company that allows loan distributions? I don’t want to close the account, as I don’t want to pay taxes on the money right now, and I also want to pay back the loan and use this tactic repeatedly. I contacted Fidelity to see if they could help me, but I don’t think they understood my question correctly. Or, they didn’t want me to use their financial products in that way. The meeting ended with the probably 24 year old Fidelity representative telling me he “knows a lot about real estate” and that it “can be way too risky” and that I should think about other options. Purchasing real estate is the best thing I have ever done for my financial stability. Wrong answer pal.

I know I probably need to talk to a professional regarding these matters, but what type of professional do I need to seek? Financial planner? I would leave my current employer very soon if it meant I could access these funds with a loan. I have a decent chunk of money “sitting there”, but I want to use it to generate income for me now, not in 30 years from now. Thanks BP!

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y

@Christopher Reynolds

Your particular 401k program probably does not offer the participant loan feature.  Part of the tax code but not always implemented.

If you leave the employer, you can move the funds to a plan of your choosing.  It sounds as if you have self-employment though your contracting business that may qualify you for a Solo 401(k), so long as you have no full time employees.

The Solo 401(k) would allow for the participant loan feature so long as you make sure you work with a plan provider that offers the option.  Not all brokerages do and most all "self-directed" plans will.  A self-directed Solo 401(k) would only be beneficial to you if you wanted to invest the plan directly into real estate instead of just financial products.  If you only want the loan to fund your own personal real estate deals, go somewhere like E*Trade for a market-focused, low cost Solo 401(k) plan that offers the loan feature.

As you note, you have had good results investing in real estate, so I would recommend you evaluate a self-directed Solo 401(k) in more detail.  Being able to diversify your tax-sheltered retirement savings into an asset class you understand can be a very powerful tool for wealth creation.

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  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    9y

    Search solo 401k on this site. @Christopher Reynolds when I found out what it was and that I qualified for it, it's not an understatement to say it changed my life.

    1Reply
  • Stan Allen
    Montgomery, AL · Member since 2016 · 2 posts · 0 votes
    9y

    Hi Christopher,

    I worked for a company that allowed borrowing from 401K. It was withFidelity also. All I had to do was log in, click a few buttons, and the money was there within a few days. I think it's up to the company. Fidelity has nothing to do with it. 

    Stan Allen

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  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    Thank you @Dana Whicker!  I will certainly search for that.  

    What made you "qualified" for it?  Who did you contact to get started?  Your reply is encouraging.  I appreciate it.

    0Reply
  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    Thank you @Stan Allen.  Since my current employer does not allow for loans, I'd be leaving them, which means no employer.  I've heard the terms "solo" and "self-directed" 401k, but I think these are two different things. Fidelity may have nothing to do with it, but I was hoping they would be able to facilitate a way for me to open a new account with them (upon my departure from my current employer) but I'm not sure they were interested.  Or perhaps I'm uneducated on how it all works. Both can be true!

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    @Christopher Reynolds

    Your particular 401k program probably does not offer the participant loan feature.  Part of the tax code but not always implemented.

    If you leave the employer, you can move the funds to a plan of your choosing.  It sounds as if you have self-employment though your contracting business that may qualify you for a Solo 401(k), so long as you have no full time employees.

    The Solo 401(k) would allow for the participant loan feature so long as you make sure you work with a plan provider that offers the option.  Not all brokerages do and most all "self-directed" plans will.  A self-directed Solo 401(k) would only be beneficial to you if you wanted to invest the plan directly into real estate instead of just financial products.  If you only want the loan to fund your own personal real estate deals, go somewhere like E*Trade for a market-focused, low cost Solo 401(k) plan that offers the loan feature.

    As you note, you have had good results investing in real estate, so I would recommend you evaluate a self-directed Solo 401(k) in more detail.  Being able to diversify your tax-sheltered retirement savings into an asset class you understand can be a very powerful tool for wealth creation.

    2Reply
  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    Thank you @Brian Eastman!  

    Would I need to do anything before leaving my employer?  I want to make sure to do everything in the correct order.  I really like working there, but I want to use these funds more than I want to work there.  Just for clarification: if my current employer does not allow for a loan distribution through their current 401k plan, the only way for me to start my own self-directed solo 401k plan is to leave the employer, correct?

    My contracting business has no full time (or part time) employees, it's just me. I will look for a self-directed solo 401k. I want to invest only in real estate with these funds.

    Thank you for the reply!  

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    @Christopher Reynolds

    It sounds like a Solo 401(k) would be a good option for you.  There are several providers of such plans here on BP who can speak with you and get more into the details.

    There is nothing special you would need to do with the current employer/plan.  Once you have terminated service you would have the ability to move those funds to any qualified retirement plan you choose.

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  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    Thank you @Brian Eastman!  I'm really encouraged.  I appreciate the help.

    0Reply
  • Bernard ReiszPro Member
    CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
    9y

    @Christopher Reynolds In general, there are many features that can be incorporated into a 401k plan, but are not offered by employers. To reduce the cost of maintaining a plan and to keep assets within the plan, plans are designed to be more restrictive than the tax code. A Solo 401k plan is drafted with only your interests in mind and will include several attractive features, including the ability to take loans.

    You may want to consider having the best of both worlds. You could get a Solo 401k plan that enables to invest in both RE and the stock market.

    [email protected]
    0Reply
  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    Thank you @Bernard Reisz!  I would likely only use these funds to invest in real estate for the foreseeable future, but if I could get a plan that would allow both RE and stock market investments, I would choose that one if the cost was comparable.   

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  • Bernard ReiszPro Member
    CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
    9y

    @Christopher Reynolds The cost should be exactly the same. A Solo 401(k) from an independent provider shouldn't include any restrictive language beyond what the tax law requires, unless you specifically request it...but why would you restrict yourself? 

    [email protected]
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  • David Murphy
    Chugiak, AK · Member since 2017 · 6 posts · 0 votes
    9y

    Christopher Reynolds, I am currently looking at options to use an old 401k with an old company I USED to work for in order to purchase a property right now under a 203k loan if I can find a reputable company to offer it.  

    My previous employer allowed for employees to borrow up to 50% of the 401k balance in the account at the time of your request.  The interest was paid back to yourself.

    Since leaving that company as an employee, I have gone back in to my fidelity account to see if the loan option was still available and found that it is not.  It was only offered to those who are employees at the time of the loan.  

    Due to my desire to learn more about my options for using 401k money to help me acquire a property, I have not moved the money from my prior employers 401k plan because it has been performing well.  I hope this doesn't hurt me in some way.  

    Good Luck.

    0Reply
  • David Murphy
    Chugiak, AK · Member since 2017 · 6 posts · 0 votes
    9y

    This is a great thread by the way. I feel many people have these questions regarding using your 401k, IRA, Roth IRA, etc for real estate investment but don't have a lot of good resources to go to in order to get their questions asked and answered.

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    @David Murphy

    You are correct in your assumption that the participant loan feature of a 401k, if offered, will only be available to current employees of the company.  Once you terminate employment, you can leave the 401k there but it becomes essentially frozen and just an investment vehicle for the funds in place.  There is no particular problem leaving funds with an old employer, unless that employer merges or goes out of business.  Your 401k money is safe and yours, but administratively it can be a bit more complicated to get the signatures required to release funds to you in those scenarios.

    401k funds would not help you with a 203k buy/renovate loan.  Those loans are for personal residences only and the 401k can only be used for investments at arm's length.  You would have to take a distribution from the 401(k) in order to use it for that purpose.  

    0Reply
  • Billy Bischoff
    Louisville, KY · Member since 2017 · 1 post · 0 votes
    9y

    What you're referring to is self-directed IRA. This investment vehicle allows you to invest outside the boundaries of "standard" investments such as stocks, bond, mutual funds, etc. You will need to roll your 401k into a IRA with a company that provides "self-directed". This should be of assistance.https://www.trustetc.com/self-directed-ira/faqs

    I actually read up on this reading The Bigger Pockets book, "The Book On Investing in Real Estate with No or Low Money Down". Great read that really had me thinking. I hope this helps!

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    @Christopher Reynolds , I have a Self Directed, Solo 401(k). My husband is self employed, and has no other employees besides me.

    If this is not true for you (or will not be true soon) then you cannot qualify for a SD Solo 401(k).

    If this IS true for you, read on.

    Your current company can - but does not have to - allow you to take a loan for up to 50% of the balance or $50,000, whichever is lower. 

    The SD Solo option allows you to invest the entire amount into almost anything. They do not allow collectibles like artwork or cars, but houses for sure are qualified. There are rules, of course. YOU can't benefit from the home, it's an investment so you can't live in it. Any expenses come from the 401(k) and any profits are funneled back into it.

    You can take your current 401(k) and roll it into the new one - but make sure you don't take the distribution personally. Have the current company make a check out to the new 401(k), not you. 

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    1Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    9y

    @Christopher Reynolds

    You can have both a 401k through your day-time employer and a solo 401k for your self-employed business provided you don't own part or your day-time employer which I'm sure is the case here. See the following for more on this: 

    https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-you-re-eligible-for-more-than-one-retirement-plan

    If you are looking to invest in both equities and in real estate, then a solo 40k brokerage account with checkbook control may be in order.

    0Reply
  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    Thank you @George Blower.  While I can have both an employer-provided 401k and a solo 401k for my self-employed business, I wish to use my employer 401k funds rather than starting another one myself. Surely it's not possible to transfer those funds into a solo 401k without leaving my employer, correct?

    0Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    9y

    @Christopher Reynolds

    One way of determining if your current employer will allow you access your retirement funds while still working for them, is to check the summary plan description (SPD) for the existing plan. The SPD is required to be written in a language or format that is easily understood by participants. Larger plans usually make the SPD available on the company’s benefits website. If the SPD is not available, the plan administrator or human resources department should be contacted for a copy of the most updated version.

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  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    @George Blower I suspect they will not, as they do not allow loan distributions, though I am still very new to this.  I will login and check their SPD, thanks!

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  • Kurt Hines
    Investor · MI · Member since 2016 · 102 posts · 44 votes
    9y
    Christopher Reynolds A potentially different way to look at things. Currently your money is locked up in the 401k because you have been continuously employed as a W-2 employee at your company. In order to transfer that money to a self directed IRA/Solo 401k, you don't have to stop working with them, just terminate your W-2 employee status. What you could do is go to your employer, and ask to become and independent contractor. Essentially you resign as a W-2 employee, and get hired as a vendor. ( Ideally, for tax purposes, you would start a S Corp or LLC, and your current employer would pay you as a vendor). Obviously, you lose all W-2 benefits, but since you are happy to leave the job, that may not matter. Also, since they are no longer paying employment taxes/benefits, they could pay you more, and it would still cost them less. This could cover the additional tax burden you could potentially face. Depending on your employer, they may or may not go for this. But if they do, you get to keep that revenue stream, and access your 401k money. Talk to a tax professional/accountant who does this kind of thing, NOT a H&R Block type person. They'll be someone who works with small businesses. Be aware that if they don't understand what you are asking, they will likely just say "that's a bad idea", because they don't understand it. This adds complexity to life, but adds flexibility, and can lower your taxes. (If Trump's tax proposal goes through, lower them a lot.)
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  • Christopher Reynolds
    OP
    Investor · Plymouth, MA · Member since 2013 · 64 posts · 9 votes
    9y

    @Kurt Hines due to the nature of my employer's business, this is not a possible option.  But good information to know in case it ever comes up in the future!  Although I hope this is the last W-2 income I  ever have :)

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