Buy real estate in your 401k

401k

401k’s are an essential investing instrument for building wealth for retirement. The reason this is a great investment instrument, is because your money will grow tax deferred. The monies can’t be used before you turn 59 ½ years of age without a tax penalty for early withdrawal plus taxation at your current tax rate. The second reason this is a great way to build wealth is your employer will match a defined percentage of your contributions dollar for dollar.

Rather than regurgitate what other articles suggest as the correct amount you should be saving in your 401k. Since we don’t know your goals and objectives, play with the calculator to figure out based your current balance and your expected remaining working years to see where you will be saving different amounts. It has been stated that the stock market on average will return around 8% per year.

If you are starting out, save as much as you are comfortable with, and increase it over time. It is a good idea to invest enough to capture your employer matching contribution; this will usually range from 2% – 6%. It is important to start early, as this will have a greater impact than waiting and trying to catch up later.

If you want to invest in real estate from a 401k there are two methods. The first is to borrow money from your 401k plan, the second is through a self directed IRA. To tap into your 401k you will have to borrow monies. The current allowable maximum loan is 50% or up to $50,000 of your balance, whichever is the lesser amount. Check with the company managing your 401k for interest rates, these rates will be much lower than you will be able to get for a personal (unsecured) loan.

There are a few caveats when borrowing money from your 401k. First is the term, if it is for the purchase of your primary residence, you will be able to secure a 10-year loan. If it is for purchase for rental or flip or for any other purpose the term will be typically 5 years. The second caveat is that if you leave this job or are terminated you will have to pay back the loan balance in full. If you don’t have money to pay back the loan it will be considered an early withdrawal and you will have to pay income taxes plus a 10% penalty, so be careful, if you job is not secure or if you are planning or think you will be changing jobs. For more information.

The second option is through a self directed IRA. Not all self-directed IRAs will allow purchase of real estate outside of REITs for investment purposes. Companies like Schwab, Fidelity and Vanguard do not currently allow this option. You will need to find an IRA custodial that support investing in real estate. You will only be able to buy real estate for investment purposes not for personal use. All proceeds must be directed back to the IRA custodian.

If you are interested in going this route be sure to seek legal advice, input from your accountant and real estate agent to get the full picture. The IRA custodial should be familiar with the IRS rules and regulation for investing in real estate from a self-directed IRA, and handle all the paper work. Be sure to ask about fees charged. For more information.

A Few Companies that provide Self Directed IRAs are listed below, again do you research before investing.

Solo
Entrust
Equity Trust