Using my 401k to purchase real estate? Who to contact?

[Christopher Reynolds]

Hello everyone! I have a 401k with a company I work for. Although my career used to be with this company, I have started a contracting business in the last few years. However, I am still employed by this company on a part time basis.

I have learned of a tactic where you can take a loan out (not closing the account) against the 401k funds. You can use the funds for whatever you wish, but why would you want to purchase a non-performing asset?! :) You even pay yourself interest, as you act as your own bank. I contacted my loan servicing company, and they said my employer does not allow loan distributions from their plans.

If I left my employer, would I be able to start a new 401k account with another servicing company that allows loan distributions? I don’t want to close the account, as I don’t want to pay taxes on the money right now, and I also want to pay back the loan and use this tactic repeatedly. I contacted Fidelity to see if they could help me, but I don’t think they understood my question correctly. Or, they didn’t want me to use their financial products in that way. The meeting ended with the probably 24 year old Fidelity representative telling me he “knows a lot about real estate” and that it “can be way too risky” and that I should think about other options. Purchasing real estate is the best thing I have ever done for my financial stability. Wrong answer pal.

I know I probably need to talk to a professional regarding these matters, but what type of professional do I need to seek? Financial planner? I would leave my current employer very soon if it meant I could access these funds with a loan. I have a decent chunk of money “sitting there”, but I want to use it to generate income for me now, not in 30 years from now. Thanks BP!

[Brian Eastman]

@Christopher Reynolds

Your particular 401k program probably does not offer the participant loan feature.  Part of the tax code but not always implemented.

If you leave the employer, you can move the funds to a plan of your choosing.  It sounds as if you have self-employment though your contracting business that may qualify you for a Solo 401(k), so long as you have no full time employees.

The Solo 401(k) would allow for the participant loan feature so long as you make sure you work with a plan provider that offers the option.  Not all brokerages do and most all "self-directed" plans will.  A self-directed Solo 401(k) would only be beneficial to you if you wanted to invest the plan directly into real estate instead of just financial products.  If you only want the loan to fund your own personal real estate deals, go somewhere like E*Trade for a market-focused, low cost Solo 401(k) plan that offers the loan feature.

As you note, you have had good results investing in real estate, so I would recommend you evaluate a self-directed Solo 401(k) in more detail.  Being able to diversify your tax-sheltered retirement savings into an asset class you understand can be a very powerful tool for wealth creation.