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How to Invest in Real Estate with Your 401K

Updated: Apr 21, 2022

Photo by Christopher Harris on Unsplash.

So, you're looking to purchase a new home or invest in real estate? Did you know that your 401(k) could help? 401(k) plans are long-term savings accounts that offer tax advantages if you comply with IRS regulations. You can make transfers or take loans against your 401(k) to access the funds for investment. Careful planning with your retirement plan can result in little or no tax ramifications—here's how to get started.

401(k) Investment Steps

First, you'll have to contact your retirement plan administrator. Your 401(k) is restricted by law from investing directly in real estate, but your administrator can help you move your funds to access the real estate market. Then do some research on loan regulations. Typically, you can borrow half of the value of your 401(k) account, up to $50,000. If you purchase real estate with funds outside of your 401(k), you won't have any tax advantages on your purchase. In order to keep taxation low, you must limit your income and capital gains. In order to continue, you'll have to open a self-directed IRA and roll over your 401(k). Although you cannot invest directly in real estate in a 401(k) account, you can rollover your 401(k) into an IRA tax-free and then use the proceeds to invest in real estate.

When purchasing real estate through an IRA, you're not allowed to manage the property directly; you'll have to hire a management company. In order to enjoy the tax advantages of your IRA, you must hire an outside person or agency to perform maintenance on the property, collect rent and otherwise actively manage the investment. You're basically done! Just make sure to keep a careful watch on your funds. If you purchase real estate through a retirement account, all funds used to purchase the property must come from the account, and any proceeds such as rental income or sales proceeds must be returned to the IRA.

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