Can I use a regular 401k to purchase real estate?

Question

Hello Everyone,

I recently joined the site and saw a lot of great discussion regarding cashing out a 401k plan versus a self directed IRA and a solo 401k plan to purchase properties.  I prefer the solo 401k because of the ability to take a loan against it and the higher contribution limits.  Unfortunately, I don't qualify because my wife and I own another business that has full time employees.  Does anyone know if regular 401k plans can be used to purchase real estate?  I would not mind setting it up for the entire company.  The companies that I called for the solo 401k plans only handle solo 401k plans and not regular.  When I tried companies that handle regular 401k plans, they said that they don't invest in real estate.

Worse case, I'll open a self directed IRA.

Thanks,

Tilmon

Bernard Reisz · Answer

@Tilmon Smith Resurrecting an old thread that has maintained its relevance, and perhaps even grown in relevance.

ERISA 401k plans covering non-owner employees can certainly be established to invest in real estate. The general rule that the tax code & IRS are investment neutral applies here just as they do in other scenarios. So, from an asset class perspective there are few restrictions on qualified plans.

Notwithstanding, there are numerous compliance hurdles to implementing such a structure. These hurdles are not unsurmountable, but awareness is necessary.

The challenge consumers face in implementing such plans is the fact that it requires expertise in multiple disciplines that are seldom found under a single roof.

The required expertise includes, but is certainly not limited to:

• Qualified Retirement Plan design & administration
• Expertise in "self-direction" that includes the full gamut of expertise required in the "Solo 401k" and "SDIRA" realm
• An entirely new realm of expertise created by the wedding of "self direction" and ERISA

In my experience, for whatever it's worth, expertise in the first 2 realms are readily available if you know where to find the right folks - albeit not under 1 roof. Expertise in the 3rd domain remains difficult to find (bold marketing claims to the contrary, notwithstanding).

John Thedford · Answer

Why do you want to put RE into your retirement plan?? I am sure you know the advantages, but do you know the disadvantages? Many knowledgeable investors will not put RE into a retirement plan due to the disadvantages. I used to think holding RE in a retirement plan was cool and sexy and the "in" thing to do. After some research, I won't do that approach. I do have a SOLO 401K but don't hold RE inside it. I want to maxi mize my tax advantages now ....and those advantages will go on 27.5 years on residential property. They work for me now and they will continue to work for me in retirement. As for my 401K, I do HML which generates high and steady returns without giving up any tax advantages of holding RE in the same plan. I feel this give the best of both opportunities.

Mark Nolan · Answer

If you want to flip properties inside a retirement plan, consider the ROBS 401k/PSP as will not be subject to UBIT. See following links.

http://www.irs.gov/pub/irs-tege/robs_guidelines.pd...

http://www.irs.gov/Retirement-Plans/Employee-Plans...)-Completed-Projects-Project-with-Summary-Reports-%E2%80%93-Rollovers-as-Business-Start-Ups-(ROBS)

Steve Vaughan · Answer

Just so people know, one cannot buy RE directly with your 401(K) while you are working there, at your employment.  Matter of fact, you can only invest in the choices provided by your employer's plan while you are still employed there.  You may be able to take out a loan, but I wouldn't recommend it. Loans have to be paid back fully withing 60 days or your leaving, being fired or dying. When you leave that company, you can roll over into an IRA, then a self-directed and/or ROTH IRA.   Just wanted to point that out to the masses that have a JOB and regular 401(k). Thanks!

Dmitriy Fomichenko · Answer

Tilmon, flipping properties inside of your IRA is considered active business and will result in UBTI taxation. You should discuss this with a knowledgeable CPA or tax attorney before proceeding with this type of investment.

Tilmon Smith · Answer

Thanks for all of your responses.  I have decided to go with a Self Directed IRA.  I preferred the Solo 401k however because my wife and I own a franchise with some full time employees, I cannot do a Solo 401k and it seems as if traditional 401k plans cannot invest in real estate.

@John, my intention is to not hold the property in my Self Directed IRA but use it to either flip properties or as a hard money lender.  We will keep rental properties in an LLC.

Thanks,

Tilmon

Mark Nolan · Answer

Try reaching out Ascensus.

https://www.ascensus.com/

Jaime Raskulinecz · Answer

@TilmonSmith

We work with a variety of third party administrators for 401k plans. It is entirely possible to have a specialist create a plan document that would allow certain categories of employees of the business to self-direct all or a portion of their 401k assets.

When we have clients who choose that option, typically then a portion of the assets from the 401k plan are transferred to our firm as outsourced plan assets.

It is a little too complex to explain everything here. However, if you contact my office someone can help you and explain.

Best regards,

Jaime Raskulinecz

Brian Eastman · Answer

@Tilmon Smith

A "regular" 401k plan (or a profit sharing plan, defined benefit plan, etc.) can be self directed.  The problem is that the administrative overhead is complex and those are not always the best vehicle for non-traditional investments.

In the Solo 401k format, plan administration is greatly simplified, since you are not managing anyone else's retirement savings.  In a broader "ERISA" qualified retirement plan capable of holding non-owner employee funds, the administration is complex, and you also take on a fiduciary responsibility for your employee's funds.  Such plans are limited in the percentage of assets that can be placed in non-traditional assets, and you have to provide the ability for your employees to self direct their participant accounts within the plan.

My suggestion would be to work with an experienced tax/retirement plan specialist to come up with a custom company retirement plan such as a Safe Harbor 401k or profit sharing plan.  Be sure to have the plan drafted to allow for in-service distributions, under a criteria that you meet today (age, time of service with the company, etc).  This would allow you to contribute generously to the 401(k) plan, but then periodically distribute via non-taxable rollover to a self directed IRA that you use for real estate investing.  Wall St firms do not typically include in-service distribution features, because they want to keep the funds in the plan and under their management.

Brian Gibbons · Answer

Talk to @Dmitriy Fomichenko

401k expert

@Tilmon Smith

Can I use a regular 401k to purchase real estate?

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