I am looking to make my first investment in commercial real estate. In doing a lot of research here on BP and elsewhere, there is so much information regarding using 401K's and self directed IRAs for real estate down payments. I need some $'s for a down payment (no more than $50K). My CPA told me that using a self directed IRA would limit my ability to invest in the property to the annual contribution limit. Also, I can't take any money out before qualified retirement. Additionally, the administrators of the self directed IRAs tend to charge high fees.
Would a personal loan from my 401K be a better option? What are the limitations with that beyond the $50K limit. Is this allowable for an investment property owned by my LLC? Any help/advice would be appreciated!! Thank you.
@Eric Thornton Does your CPA work with a lot of real estate investors? If they did they would know that you can take up to 50k or 50% of your Solo401k balance (whichever is less) as a 5 year loan at prime plus 1% so you would not have to worry about justifying how it is used. I would direct all your solo401k questions to someone qualified. I would buy use the Solo401k balances to buy properties because they are correct that managing the funds from that point forward would have to be with solo401k loans if you are using it for recourse and also you lose a lot of tax benefits like depreciation investing out of a solo or self directed.
If you want a good Solo401k that help you with the paperwork to take a loan out of your Discount Solo401k as well as any questions you might have try Justin Windham with Discount Solo401k. If you want his contact information PM, or you can find him on Bigger Pockets as well.
Good questions. Yes the 401k participant loan proceeds can be used for any purpose since the funds borrowed from the 401k are no longer deemed 401k funds once they have been borrowed. You will want to confirm your current employer 401k plan allows for 401k participant loans (most do).
To learn more about the 401k loan rules, see the following:
One of the differences between investing the 401k participant loan proceeds in real estate vs doing it in an IRA is the IRA won't own the property so it won't subject your investment to the IRA rules. Most of the same rules apply if you were to purchase the property through a solo 401k plan--that is, the property would be owned by the solo 401k plan.
Using the participant loan feature of a 401k to purchase a property would allow you more flexibility than if you were to invest a self-directed IRA directly into the property. If you want to generate income for yourself rather than your retirement account, the loan feature can a good tool to utilize. If you are eligible for a Solo 401k, you can have access to both methods of investing. You can borrow from the Solo 401k (but not from a self-directed IRA) to invest outside of the retirement account and generate income for yourself. You can also invest the Solo 401k directly into real estate (and other) assets to generate tax-deferred (or tax-free) income for your retirement account.
Thank you Casity, George and Justin. Great advice and very appreciated! I am going to focus on using a participant loan.
I don't see where the OP said it was a Solo 401k, so I'm just reminding him that if you take a 401k loan from an employer-sponsored plan, and then leave your job, you must pay back the entire amount within 30-90 days. Ask your HR rep for more information about their repayment procedure. If you can't pay it back within that amount of time, you may be required to pay fees and taxes on the money outstanding.
Not every separation from employment is voluntary...
I would also take a look at the
Tax Cuts and Jobs Act of 2017 (P.L. 115-97)
as it now providers favorable option to combat the 30-90 days rule.
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As many before me explained, using a $50k 401k loan is an easy route. By the way, $50k is only one of the limits, and the other one is 50%. So, if your 401k is $80k, then you can only borrow $40k.
Problems with such loan are a 5-yr repayment window and a possibility of an early recall if you leave your employer.
As long as you stay at your job, you cannot use 401k funds for your REI business, other than via a loan. You will be limited to IRAs. However, your CPA is incorrect suggesting that you will be constrained by annual IRA contribution limits. You cannot contribute more than that, true, but your IRA is allowed to borrow money. You only need enough for a down payment.
Borrowing within a self-directed IRA triggers some taxes, so be sure to talk to an expert before doing it. Alternatively, you can try to aggressively grow your IRA with other investments before using it to buy properties.
Also true, you cannot take the money out - but it's the whole point of doing it! Keep the money there and let it grow tax-free.
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