CAN YOU USE YOUR 401K TO INVEST IN REAL ESTATE?

If you’re considering investing in real estate, one of the biggest challenges you’ll face is funding the purchase. If you’ve been contributing to a 401k, you may be wondering whether you can use that money to fund your purchase. But is it possible to use 401k investing to buy real estate?

CAN YOU USE YOUR 401K TO INVEST IN REAL ESTATE?

Yes, and no. Generally, you cannot use your employer’s 401k plan to invest in real estate directly. But you may be able to use the assets in your 401k plan to make real estate investments.

BORROW AGAINST YOUR 401K

Take the time to research loan regulations. You may be able to borrow up to half of your 401k’s value, up to $50,000. 

However, it’s important to note that if you’re using funds outside of your 401k to make your purchase, you will lose those tax advantages. Another crucial thing: if you borrow against your 401k, the money must be repaid by the deadline.

ROLL OVER YOUR 401K

You can’t invest in real estate directly with a 401k account, but you can rollover your 401k into an IRA account tax-free. This would allow you to use those proceeds to invest in real estate. 

If you’re going this route, you’ll need to hire a real estate management company. If the property is purchased through an IRA, you will not be allowed to manage it yourself if you want to maximize the tax benefits. The management company will be in charge of maintaining the property, collecting rent and managing the investment.

All of the funds used to purchase the property must come from the IRA, and any sales proceeds or rental income must be returned to the IRA account. If you follow these rules, the tax ramifications will be minimal (if any). 

USE A SELF-DIRECTED 401K

A traditional 401k does not allow you to invest directly in real estate. But with a self-directed 401k plan, you are in charge of your retirement plan.

Through a self-directed 401k, you can buy residential property, land or even commercial property. All of the income your properties generate will be tax-free. 

That being said, these accounts do have limits on the types of transactions that you can undertake. For example, you cannot buy or sell property that relatives live in.

INVEST IN AN REIT 

If you have a traditional 401k, there may be a real estate investment trust (REIT) available in your investment options. There‘s no guarantee that a real estate investment trust will be included in your options, so keep this in mind.

Additionally, an REIT is different from investing in real property. An REIT is an entity that owns, operates or finances properties that produce income. REITs allow you to invest in real estate indirectly without having to take on the burden of managing the property yourself. 

While you cannot purchase real estate directly with your 401k, you can use the options above to leverage your 401k assets for real estate investments. It’s best to work with a professional to help you understand what you can and cannot do with your funds, and find the best option for using your 401k for real estate.