How do I use my 401K to buy real estate?

[Neil Polehn]

Hello All!

I have a traditional 401K with Fidelity from my old company, Cisco Systems, that I retired from. I don't want to pay income tax for withdrawing the funds (700K) and don't need the income from it, but I would like to invest in real estate if possible. Is there a way to invest this money in real estate without taking it out as ordinary income first and then having to pay tax on it? I would love to invest it in real estate and get more returns then bonds and stocks. Move it to an IRA first..?

Thanks in advance!

Neil

[Brian Eastman]

@Neil Polehn

You can explore a self-directed IRA. This is an IRA like any other with respect to the tax code. What is different is that the IRA has more investment choices beyond the stock market, including things like real estate.

You could rollover some or all of your 401(k) and invest as you choose. Because this is still a tax-sheltered IRA, there are no taxes on the rollover or on the income generated from plan investments. You will pay taxes only when you distribute income to yourself, just like any other IRA/401(k).

There are also rules you need to understand about keeping all investment activities at arm's length and avoiding any self-dealing or dealing with close family. There is lots of information here on BP about self-directed IRA/401k plans and the ability to diversify your savings.