How to us 401K to invest in property?

6 Replies

I keep hearing stories that people are using their 401K to invest in Real Estate. How do I about taking out my 401K without getting penalize or having to pay it back? 

@My Lo ,

First, if you have a 401k with your current employer you are most likely not going to be able to do it, typically current employer 401k can't be rolled over until you are either no longer employer or reach a retirement age.

If your 401k is with the past employer then you are free to move those funds into another retirement account. What you will need is a Self-directed IRA, after you set on up you will be able to request a direct rollover from your 401k into your newly established SD IRA. From there you will be able to invest in alternative assets including real estate.

Gotta do what makes sense for your own situation but I'll give you some insights into my own plan. With a 401k you can typically take the greater of: $10k or 50% of your 401k balance as a loan up to a maximum of $50k.

The interest you pay is going back to yourself, at a low APR, and you're now using pre-tax money to help with repairs, a down payment, etc.

My current properties have all been financed post-tax but eventually I plan to buy a property using a loan from my 401k + conventional financing. I.e. buy a $60k cashflowing property in the midwets using a 25% down loan, downpayment is covered by a $15k loan from my 401k. No hit to my post-tax savings, all of the money will eventually go back into my 401k, but now I gain another cashflowing property.

Look into the exact details of your plan to see repayment period, loan terms, etc. 

One thing that is pretty standard with a 401k loan is that if you leave your company (fired, laid off, quit, doesn't matter) then you will need to repay the loan within a set period of time - typically 60 days. That's an important caveat to keep in mind with this strategy and you should have some liquid form of investments such as stocks that you can tap into should you need to repay these funds.

@My Lo

Get a copy of the Current Employer SPD

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.