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

Question

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 · Answer

@Quincy HallIf 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

Quincy Hall · Answer

@George Blower Thanks, I know about the 401k loan plan that my employer provides because I used it before. I had to re-pay myself 5.75% interest with 5yr term. I used it to purchase a AC at my primary residence years ago. But the information you shared with me is valued. Thanks

John Teachout · Answer

I used funds from an IRA to fund rental property but it was after I was old enough to not have a penalty. I figured I could grow the money better with a rental than it would do in the funds. (I still have other IRA funds)

Richard Weinberg · Answer

@Quincy HallMy answer is not designed to be confusing. Absolutely not!I am close to retirement age and the rental homes will feed us but it’s clear we will need both....Houses and access to some cash.In addition, Your 401k grows tax free but if you liquidate it, it’s taxed and you have to pay early withdrawal penalty’s. Lastly, as you start to work less the bankers want to loan you less no matter how great your credit is. The time you have to let your rental home equity grow and your cash grow is a blessing. Let it grow benefit you!Good luck!

Randy Rodenhouse · Answer

@Quincy HallYou could convert your 401k to a solo 401k (if self employed with no employees) and then buy a house in that solo 401k and either resale it or keep as rental. I probably would not want to buy as rental in 401k since you don’t get the tax deductions (property taxes, insurance, expenses, etc.) that you would if purchased in an LLC. But some people just like the cash flow and that is fine. And as the others said you could borrow against your 401k and get the money for your real estate investment that way but remember you have to have a plan to pay back.

Quincy Hall · Answer

@Taylor L. I really appreciate the input. I didnt have a warm and fuzzy feeling about removing my 401k to invest with.

Taylor L. · Answer

I think no, for 3 reasons: 1) The tax deferral of a 401(k) is an awesome benefit and one of the few that busy W2 professionals get2) Interest rates are very low and debt is cheap right now, so buying free and clear largely doesn't make sense3) Having some exposure to the stock market isn't the worst idea in the world. From your profile picture you seem to be a pretty young guy and probably have some years until retirement. The S&P 500, for example, has an excellent long term track record and over the course of the next 20-30 years will probably perform quite well. If the biggest companies in the world fail we're going to be faced with bigger problems than paying for retirement, because other things have gone very wrong.Real estate as a retirement plan is fantastic. I would just suggest you find another way to finance it.