How to leverage an old 401k to start REI

Question

I'm hoping the community can offer me a few options and advice on how I can leverage an old employer 401k account for my first deal. I'm 25 and left my first job out of college to pursue a new career. The balance in my old employers 401k account is about 17k and because I have left the employer I cannot take a loan out against it. I've considered rolling the account over into my new employers 401k plan but then I got to thinking I might be able to better use it to help with a down payment on my first deal. I'm looking to start by being an owner occupant of a  small multi-family 2-4 units in the Denver area. What do you think are the best ways to leverage the account to get started in Real Estate Investing while avoiding the high penalties for early withdrawal? Is a self directed IRA or a Solo 401k something I should be considering? Thanks for insight!

Justin Cooper · Answer

I think Theresa's idea could be a great one. I might suggest looking into rolling over the IRA into a self-directed IRA and try using that. There are some strict rules about how you can and cannot partner with your SDIRA and I can never remember them but I would look into that before you roll it over just in case. You could also roll your IRA over into a self directed IRA and then "trade" IRA's with someone else, basically you could loan them money from your IRA and they could loan you theirs. If you roll over into the SDIRA, you will be able to also use it for other deals in the future. You might also be able to change the type of IRA so that you can contribute more to it each year and grow it faster that way. Having a SDIRA can be very powerful. I just bought a non-performing note with mine, something I had never even thought of but because I had the SDIRA already set up, I was able to move quickly and get it done. Speed can be very powerful in Real Estate. I would reach out to New Direction IRA if you want to look into rolling into the self directed IRA. They are local here in Colorado and deal with real estate investors all the time. They also do a ton of free education. Let me know if you would like an introduction.

Good luck!

Kaleb M. · Answer

Thanks everyone for the quick responses! Thought provoking and encouraging. I'm going to do my homework but I think rolling the account over to my new employers plan is a great option.

Loren Whitney · Answer

Thanks for the plug @Justin Cooper

Welcome to BP @Kaleb McKey We're practically neighbors in the Denver community.

I notice that you want to owner occupy the property to get started. If that's the case then you won't be able to use an SDIRA for that specific investment. When you use IRA funds for real estate investments, they must be arms length from you. Simply put, you can't live in a property that's co-mingled with investment funds from your IRA. That being said, the 401k rollover and loan option may work out better for you.

Feel free to keep asking questions!

Dmitriy Fomichenko · Answer

@Kaleb McKey

another consideration to keep in mind is that if you buy property inside of your IRA you have to use Non-recourse financing. You can not use conventional loan since you are prohibited to provide personal guarantee. The down payment with non-recourse loan is 30-50% depending on the location and property type.

Bill S. · Answer

@Kaleb McKey - $17K won't be down payment on much of a property in Denver. I don't know the ins and outs of that but I do know there are lots of rules. You can purchase property within an IRA but I don't think you can use IRA money as a down payment for a property you will own outright unless you do it via a loan. Owning the property within an IRA is probablimatic because of all the rules. One I know if is you can't do any of the work on the property yourself. Everything has to be hired out to a third party. I realize not everyone would consider that to be an issue but I said it because you should really learn about limits before moving in that direction.

I like @Theresa Randall 's idea if you go that route.

Diversity is the name of the game so I would recommend that you leave the 401K money alone and in stocks.

Dmitriy Fomichenko · Answer

@Kaleb McKey

first of all great job on starting your real estate investment journey early in life. When it comes to real estate most people wait, but the right thing to do is to buy real estate and they wait.

Here are few things for you to consider:

If you rollover your old 401k to the new employer 401k you might be able to borrow against it. You will have access to only 50% of the account balance or $50K, whichever is less. This might be 'positive' for you since you will be able to access some of your retirement funds and use it for your proposed deal. The 'negative' is that investment choices with the employer sponsored 401k plans are very few and poor. Unless you decide to use half of your balance ($8,500) as a loan I would generally advise against this and move those funds into an IRA instead.

Your other option would be rolling over into SD IRA (or Solo 401k if you have some self-employment income). With that you will be able to use those funds for real estate investing, however, since you are planning on living in one of the units this will not work.

Take time and educate yourself about Prohibited Transactions when it comes to SD IRA before you jump in.

How to leverage an old 401k to start REI

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