Can I pull my 401k to buy an investment property w out penalty?

10 Replies

Many investors (like me!) turn our 401(k)s into Self Directed IRAs and invest that way. I use mine exclusively for syndication deals. Generally speaking there isn't a penalty to move into a SDIRA, as long as you've left your job. 

When investing with retirement accounts you have to stay in compliance, i.e. not doing transactions with prohibited persons (yourself, your heirs, your parents, the list goes on). You can't mix funds with your personal cash, and many other requirements.

@Sean Robles ,

When you take distribution from your 401k you will have to pay taxes on the distribution amount (assuming this is tax-deferred account, not Roth). In addition to this if distribution is taken prior to normal retirement age - you would have to pay penalties. There is no way to avoid this.

You can also set-up a self-directed IRA, do a direct rollover from your 401k to SD IRA and then invest in alternative assets with your SD IRA. But keep in mind the property would be owned by the IRA, not by you personally. All income must go into the IRA, and all expenses must be paid by the IRA.

You can use leverage when buying rental in an IRA, but the loan must be non-recourse since you are considered to be "disqualified person" to your IRA and therefore not allowed to provide a personal guarantee. Here is a list of lenders offering such financing:

https://www.biggerpockets.com/blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

When you use leverage inside of an IRA that would create Unrelated Debt Financed Income, which would be subject to UBIT tax. Make sure you understand the numbers. Self-directed Solo 401k on the other hand is exempt from UBIT on leveraged real estate, therefore if you qualify this would be superior option to consider. 

If you do a withdrawal the answer is no. If you do a loan the answer is yes as long as you pay it off before you quit or are fired.

If you have an old 401k you can roll it over to a self directed IRA or solo 401k and invest with this new retirement Acct, but you have to leave all the gains in the account and can't use the money until you turn 59 and 1/2. Everything has to stay in the retirement plan.

I was just looking into this myself today. Like Alina said, you can take advantage of a loan from your 401k if it allows for it. This is a fee free way to use the funds without them being taxed. Also, the interest rate that they will charge for the loan is probably comparable to what you would make if you left the funds in your 401k. It all goes back into your fund. Make sure you look at the fine print to make sure that you are OK with the terms that will be applied if your position is terminated or if you leave the job. I'm sure the rules change from fund to fund so yours may work slightly different. Worth looking into though!

You should be able to take a loan against your 401(k) - up to $50k - but you will need to pay it back with interest (well, technically pay yourself back with interest).