Should I use my 401k to purchase a rental property?

[Quincy Hall]

I recently had an investor tell me that i should deplete my 401k in order to purchase a property free and clear. He said that if i was to make that move i would need to be sure that realestate is what i want to use to retire with since i would be spending my retirement savings. He said that I could use realestate as a retirement plan or use my 401k and trust the stock market. Advice Please!!

[George Blower]

@Quincy Hall

If the money is in your current employer plan and you saved the money from working for your current employer, you generally can't take the funds out of your 401k until you quit your job.

As an alternative to taking a distribution from your 401k, consider the following:

• If you are self-employed (i.e. active self-employment earned income separate from your w-2 income) with no full-time w-2 employees, you can set up a Solo 401k and then rollover your 401k funds once you leave your current job.
• You could then take a loan of up to 50% of the balance not to exceed $50,000. Please be sure to select a Solo 401k plan provider which allows you to take a loan and will prepare the required 401k loan documents.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
• There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
• Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• As an alternative to taking the loan, you could even purchase the investment property directly using funds in your Solo 401k (assuming you select a Solo 401k plan provider which allows you to invest in real estate). If you don't have enough Solo 401k funds to purchase the property as an all-cash deal, you can combine your Solo 401k funds with non-recourse debt to purchase the investment property. Learn more about non-recourse lenders here: https://www.biggerpockets.com/member-blogs/9552/70408-ira-and-solo-401k-non-recourse-lenders