What’s the best way to leverage 401K’s to buy rental properties?

[Tom Arttus]

Hi BP group,

I, and I'm sure many, have a lump sum of money in a 401K/IRA. I currently have my money is a self directed IRA and use it for hard money loans. I flip the funds and do well with this strategy. However ideally I'd like to take it out of my 401K (without penalty?) and invest it in real estate. I know I can invest in real estate inside of my 401K, but than I don't see the cash flow now. While I'm not looking for a quick fix per se, I am looking for cash flow so my wife and I can leave our W-2 job and spend more time with the kids/family.

Podcast, books, advise all welcome.

[Valerie Post]

Hi, Tom,

To my knowledge, there is no way to access cashflow prior to 59 1/2 without taking a withdrawal (or a loan and I strongly recommend against that) from your 401k . I looked into this myself and looked at the benefits of using a custodian company. In 2020 you were allowed to take up to $100k out of your 401k or IRA penalty-free through the CARES Act. While that Act extended into 2021, the pension allowance did not. It might be a good time to evaluate 2 things. 1) What are the risks of your company going bankrupt (at which point your 401k disappears); or the stock market losing your money in a recession, depression or government default before you are 59 1/2, as opposed to taking a 10% penalty and having the money free and clear? 2)Do the tax benefits you would be able to use (like depreciation) make up for the 10% penalty? (Those tax benefits will not be realized in a self-directed IRA or 401k.) So much to consider! Best wishes and I hope this was helpful.

[Frank Rodrigues]

Tom, 

you cannot cash out from a SDIRA without paying penalties unless you are 59 1/2 years old.

[Allen Wu]

@Tom Arttus

I took out a loan, but you have to pay back. If you quit or terminated, you need to pay back within months.

[David Held]

Hi Tom,

When I was in this same situation, I found a property that I was able to purchase as two pieces. This was raw land which made it easier but it could also work if you were buying multiple buildings/units in the same deal. The self directed IRA bought part and I bought part. The individual purchase prices were adjusted so the IRA was making a "bad" investment, but a good chuck of the IRA funds were able to be pulled out through the transaction for use and multiplication today. You don't get to totally cash in the IRA, but this way you can have two parallel investing paths working for you and get a real jump start on the investing for yourself today if you have a large amount of capital in the IRA. The key is finding the right deal so you can do this and have it make sense for your own financial goals and plans.

[Nick Barlow]

@Tom Arttus 401(K) loan. The interest goes to yourself. Have to check your plan, but most seem to have limits of 50% of the balance, or $100k, whichever is lower.

After a year (at least with my employers plan) you can repay lump sum.

Something else I think of (and I’m not a financial advisor and this isn’t financial advice) is that the market is due for a correction, however, you loan and repay in dollar amounts, not shares. If you loan today, at highs, then the market drops, then you repay at depressed prices, you’ve protected your portfolio from a loss while selling high, buying low, and adding a rental to the portfolio 🙂.

[Allen Wu]

@Nick Barlow

It's 50k max. That's what i did. Trying to buy dips over 5 years when i repay Loan back while have my SFH cash flowing

[Zachary Beach]

@Tom Arttus look into the back door and mega back door Roth IRA. Once it's in the Roth you can take out the contribution penalty free after it's been in 5 years maybe sooner depending on a few factors. Or if the deal is good enough and urgent just pay the penalty sometime it's worth it.

[Craig McLaughlin]

@Tom Arttus

There is a provision in the house reconciliation bill currently working its way thru Congress that will disallow a 401k and IRAs from investing in non-registered securities. Which I believe includes all real estate. Bill also says (as of now) that IF a retirement account is invested in non-registered securities; you must dispose of it by dec 31st , 2023. Proceed carefully until this bill passes as is or not.