How can I use my 401k to buy rental properties?

Question

Are there other options besides taking a loan from my 401k?

I can loan myself a max of $50,000. While that will help, I may need more and I have a pile of cash sitting there that I'd like to diversify away from stocks and bonds.

Are there other creative 401k options ?

Mark Nolan · Answer

@Steve S.Another option is to invest the 401k directly in real estate where the 401k takes title to the property. All expenses and income flows through the 401k. However, if you are talking about a current employer 401k this option won't be available. On the other hand, if it is a former employer plan, you can open a self-directed solo 401k if you are self-employed, or a self-directed IRA and then transfer the 401k to one of these vehicles which can then be invested in real estate.Following are the similarities and differences between the solo 401k and the self-directed IRA.The Self-Directed IRA and Solo 401k Similarities Both were created by congress for individuals to save for retirement;Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;Both allow for Roth contributions;Both are subject to prohibited transaction rules;Both are subject to federal taxes at time of distribution;Both allow for checkbook control for placing alternative investments;Both may be invested in annuities;Both are protected from creditors;Both allow for nondeductible contributions;Both are prohibited from investing in assets listed under I.R.C. 408(m); andNeither may be invested in your own business. The Self-Directed IRA and Solo 401k DifferencesIn order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;To open a self-directed IRA, self-employment income is not required;In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;The solo 401k allows for checkbook control from the onset;The solo 401k allows for personal loan known as a solo 401k loan;It is prohibited to borrow from your IRA;The Solo 401k may be invested in life insurance;The self-directed IRA may not be invested in life insurance;The solo 401k allow for high contribution amounts (for 2017, the solo 401k contribution limit is $54,000, whereas the self-directed IRA contribution limit is $5,500);The solo 401k business owner can serve as trustee of the solo 401k;The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;Pre-tax IRA contributions on reported on line 32 of Form 1040;Pre-tax solo 401k contributions are reported on line 28 of Form 1040;Roth solo 401k funds are subject to RMDs;A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);Roth IRA funds are not subject to requirement minimum distributions (RMDs);The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; andAt termination, the self-directed IRA is only required to file a form 1099-R.

Robert Herrera · Answer

@Steve S. You can't access the profit before 59.5 with a retirement account. If you buy a property with the money, all of the rent profits have to go back to retirement account. I don't really like retirement accounts. You could take your money out now, get taxed on it, then you can enjoy the profits. Also, stop putting money into that account. Open a business account and put it in there. Buy your properties with your business. Enjoy the profits. It's really up to you. If you hold on to the retirement funds, and start taking it out when it is built up, the tax's are going to be higher as you are pulling out more money.

Brian Eastman · Answer

@Steve S.Unless you are age 59 1/2, then your 401k savings is likely tied up in your current employer plan and limited to what they offer as far as investment choices. You can check to see if the plan offers an "in-service" distribution option and if you qualify. Most plans do not, because they are designed and implemented by Wall St focused firms that want to keep your money in the plan where they earn management fees and commissions. At 59 1/2, an in-service distribution will be available to you per the tax code, even if you are still working with the company.If you change jobs, you would then have the ability to move the current 401(k) to a plan of your choosing such as a self-directed IRA - or Solo 401k if you qualify.If some of the money in your current plan was rolled into that plan from a prior job/company, then you should have the ability to roll that out to a plan of your choosing.

Mark Nolan · Answer

@Joe Pitrolo1. Self-employment income does not have to be generated through W-2 income; it can also be generated through schedule C income. The rule is that it has to be earned income not passive income. Most individuals that open a solo 401k are sole proprietors. 2. If you want to have a solo 401k where you will be able to invest in both alternative investments such as real estate, in addition to equities (stocks and mutual funds), then you will need to adopt a solo 401k from a solo 401k provider who can assist you in opening a brokerage account for the solo 401k at Fidelity Investments, TD Ameritrade or Charles Schwab for example. One of these brokerage firms will then issue a checkbook that you can use for placing your real estate investments and any unused funds can be invested in the stock market. Many of our clients go this route as it is generally one-stop shop.

Steve S. · Answer

That's exactly how I understand them to work if they are in selfndirected acclunts but that comes with other rules that may not make it a viable option. Which of course is why I asked the question to try to learn about options or lack tuereof. Obviously no one would pay the penalties required to access funds to use them for an investment property. If one was desperate, maybe, but not to invest.

Brian Eastman · Answer

@Steve S.That is simply not how retirement plans are designed to work. If you want "access" to the funds, you need to take distributions and pay the taxes.

Steve S. · Answer

Understood. In addition to those benefits, I'm wanting to access several hundred thousand in those accounts that I don't currently have access to in order to avoid putting cash into properties.

Brian Eastman · Answer

@Steve S.You are looking at this from the entirely wrong perspective. A retirement plan provides tax sheltering that allows you to grow the value of the savings much more than you could in a taxable account. Like many, you want to compare investing in real estate with taxable funds and doing so with tax-sheltered retirement funds. That is apples and oranges.When evaluating whether it makes sense to put retirement savings into real estate, you need to compare how the retirement savings will perform as compared to if it was invested in conventional financial products.Many smart investors diversify their tax-sheltered IRA or 401k into solid, income producing assets such as real estate or private mortgages and end up with much better results for their future.

Steve S. · Answer

My 401k has a self directed option with Charles Schwab but if I can't access the funds for over 20 years AND I can't take depreciation, it doesn't really make sense for me

Steve S. · Answer

Thanks. I'm meeting with my CPA next week to discuss options.