What move to make with a 401k?

13 Replies

So my mother has a 401k that she needs to roll over into something. She is willing to loan the money to me to help purchase real estate. Thereis roughly 26k in the account. What would be the best vehicle to move this money to in which she would garnish the best tax advantages and help any proceeds we pay her to be tax free/deferred? My mom is 56, works full time and doesn't need the money right away. I would like to help her build her nest egg even more by the time she decides to retire. Thank you for your help.

She needs to check because lending to  her immediate family members may be a prohibited transaction. If so she could lend to others that wanted to borrow money for Real Estate purchase. That would take a little research and due diligence to make sure your money is protected.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

@Susan Oram

Your mother's retirement account cannot lend money to you. It is specifically prohibited by the IRS. Her account can purchase real estate, but you cannot have any financial involvement. 

Talk to a 401k expert, like @Dmitriy Fomichenko .

Your Mom can borrow against the 401K, and payments are calculated with interest that gets paid back to the account.  So, she is paying herself back with interest.  That would help her buy property as she could use it as a down payment.  If you want to help her buy RE to build her nest egg, let her buy the property.  Then she won't have any issues with her 401K being lent to a disqualified person.

I recommend building your own track record before risking your mom's retirement account.  And it's not worth the possibility of ruining family relationships.

Agreed Mike! After you are experienced she could go in on a deal with you and be a % owner.

Scott

@Mike Dymski and @Scott Hawley ,   This is only one of her retirement accounts from her last job, not 100% of her money to risk, I would never do that to my mom.  She recently left a position to go to another company and is thinking of getting into some real estate minded avenue.  She would rather be a private money lender rather than owning or being a landlord.  She doesn't want the "headaches" that come with this business.  She has seen me build my real estate portfolio and would be willing to use these funds to help.  I own 7 properties, so this would not be a first foray into RE for me. I appreciate you looking out for my mom.

Thank you @Chris Seveney for the suggestion to speak with Brian Eastman and @Michael Plaks for recommending Dmitriy Formichenko.  I will be reaching out to both of them.

@Cara Lonsdale   I will run your suggestion by her, just in case she may consider owning herself.  

@Susan Oram

Not that fast with Mom borrowing against 401k. She cannot borrow more than $50k. She will also have to repay within 5 years, which means either selling the property in 5 years or repay with some other moneys. 

Here is an article which just happens to be written by @Dmitriy Fomichenko

@Susan Oram

I would look at what your mom understands and is good at. If it is real estate, lending, precious metals, stocks, etc let her use her experience and knowledge to invest. 56 is not that old.. It is important that your mom is comfortable with her investments. Self direction is not for everyone. 

 Your mom can even learn to invest in other assets if you feel strongly about it and you can help her. It seems if that is the case a SDIRA is the answer because it sounds like your mom works for a company as a W2 employee. 

Do not borrow the money from your mom, it is prohibited as many have stated above. 

Originally posted by @Michael Plaks :

@Susan Oram

Not that fast with Mom borrowing against 401k. She cannot borrow more than $50k. She will also have to repay within 5 years, which means either selling the property in 5 years or repay with some other moneys. 

Here is an article which just happens to be written by @Dmitriy Fomichenko

 The balance is only $26K.  So, this won't even come into play.  Most likely the max she would be able to borrow is $13K, which is 50% of the balance, and below the $50K max.

@Susan Oram

With a former employer 401(k), a loan is not an option. That would only available with a current employer plan. A self-directed IRA would allow your mother to diversify these funds, but as has been noted, any intersection with you as a disqualified party to her IRA would be in violation of IRS rules.

If you are well networked in real estate, I am sure you could help your mother find some private lending opportunities that make sense with other investors.  She could lend money short term for flips or new construction, as an example.

I would suggest focusing on whether there is a good place to put the money that feels right, safe, and will produce good consistent results. If so, then take a look at self-directed IRA plans to get there.

@Susan Oram

One option without violating the prohibited transaction rules which as covered in the following IRS page (

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions)

is for her to keep the 401k where it is and take 401k participant loan if the plan allows for it.  The following page covers the 401k participant loan rules. 

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

There may be other creative ways of partially accomplishing what you are trying to do so you will wan to speak with a competent attorney/CPA.

thanks all for the suggestions and info. I have been sharing all the info you've suggested and recommended.

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