investing 401k money

7 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.

Dude. Your profile says are a licensed CPA!  You should know the answer to your own question. 

If you do not, you should not be taking money from people!

@Jason Malabute

If the 401(k) is with her current employer it is likely locked up in that plan.

If it is a 401(k) from a previous employer, she could explore rolling it over to a self-directed IRA or Solo 401(k) plan. These are tax-sheltered retirement plans just like at a brokerage, but with different plan architecture that allows for plan investments in alternative assets like real estate, stock of privately held companies, cryptocurrency, etc.

There is a lot of great info on the topic here on BP.

I"m NOT a CPA but I do know the following.

If she takes the money out of a qualifies plan, she will likely get taxed at a 10% penalty plus whatever her normal earned earned income tax rate is, assuming she does not have another way of offsetting that, like being a real estate professional.

If she invests with you using an SDIRA, she will pay no tax for putting the money in your deal, but if you use leverage, will likely pay UBIT taxes.

@Jason Malabute

As others have mentioned, if she takes a distribution from her 401k to invest, then she will have to pay an early distribution penalty and income tax if she has pre-tax 401k assets (as opposed to Roth 401k assets). If her 401k is with a previous employer, she would be able to move those funds to a retirement account that does allow for investment into alternative assets such as real estate. This would allow her to invest without paying taxes or penalties.

Most 401k plans with current employers are set up to prevent assets from being transferred out until the employee leaves that job. There are some exceptions however, and if this 401k is with her current employer, she can ask the plan administrator if the 401k allows for in-service distributions. With an in-service distribution, she may have access to transfer at least some of the 401k funds to a self-directed IRA or a Solo 401k while she still works for that employer. Between the two structures, the Solo 401k is generally preferred as long as eligibility can be established. Eligibility requires the presence of self-employment activity and the absence of non-owner employees. Both structures can provide checkbook control. There are several providers on Bigger Pockets that can answer questions about these structures, eligibility, and in-service distributions. I would recommend reaching out to a few to learn more.

Originally posted by @Brian Eastman :

@Jason Malabute

If the 401(k) is with her current employer it is likely locked up in that plan.

If it is a 401(k) from a previous employer, she could explore rolling it over to a self-directed IRA or Solo 401(k) plan. These are tax-sheltered retirement plans just like at a brokerage, but with different plan architecture that allows for plan investments in alternative assets like real estate, stock of privately held companies, cryptocurrency, etc.

There is a lot of great info on the topic here on BP.

 Thank you so much

Originally posted by @Greg Scott :

I"m NOT a CPA but I do know the following.

If she takes the money out of a qualifies plan, she will likely get taxed at a 10% penalty plus whatever her normal earned earned income tax rate is, assuming she does not have another way of offsetting that, like being a real estate professional.

If she invests with you using an SDIRA, she will pay no tax for putting the money in your deal, but if you use leverage, will likely pay UBIT taxes.

thank you

Originally posted by @Justin Windham :

@Jason Malabute

As others have mentioned, if she takes a distribution from her 401k to invest, then she will have to pay an early distribution penalty and income tax if she has pre-tax 401k assets (as opposed to Roth 401k assets). If her 401k is with a previous employer, she would be able to move those funds to a retirement account that does allow for investment into alternative assets such as real estate. This would allow her to invest without paying taxes or penalties.

Most 401k plans with current employers are set up to prevent assets from being transferred out until the employee leaves that job. There are some exceptions however, and if this 401k is with her current employer, she can ask the plan administrator if the 401k allows for in-service distributions. With an in-service distribution, she may have access to transfer at least some of the 401k funds to a self-directed IRA or a Solo 401k while she still works for that employer. Between the two structures, the Solo 401k is generally preferred as long as eligibility can be established. Eligibility requires the presence of self-employment activity and the absence of non-owner employees. Both structures can provide checkbook control. There are several providers on Bigger Pockets that can answer questions about these structures, eligibility, and in-service distributions. I would recommend reaching out to a few to learn more.

 thank you this is great help