401K or IRA?

Question

I looking at to get started on a 5 to 6 month rehab project with a high pay out at the end.

If I needed to, and as long as the 401K allows lending against it, would I be able to use a 401K loan as a bridge loan for about 2 months until I cleared up other more traditional lending methods to pay the loan back? The Rehab will not be complete at this point just paying the tax free savings back. Also thinking of using self directed IRA money and paying it back in to my account with same lending process. Any legal issues with this or will I need to keep the 401K/IRA money in the deal until the project is complete and the final pay out is done?

Thank you for any info you can provide in regards to this.

Ted

Edward C. · Answer

Awesome, Thank you.

Justin Windham · Answer

If you just want to borrow from your existing 401k, the business with no employees does not apply. As long as your current 401k allows for participant loans, you can borrow the funds and use them in your project.

I believe the mention of the business with no employees was referring to qualifying for a Solo 401k. A self-employed individual can setup a Solo 401k for his or her business that allows for participant loans as well as direct investment into real estate (among other assets), as long as they don't have any full time non-owner employees in the business. Again, this doesn't apply if you are just taking a loan from your 401k at your employer.

Edward C. · Answer

Hi Sean, what do you mean solo 401K, you mean my own personal 401K? No this 401K is from a day job with lots of employees. Do you mean I need to show that I’m borrowing from the 401K as a Solo business with no employees? It looks like just a standard personal loan application.

Please elaborate.

Dmitriy Fomichenko · Answer

@Edward C.

please note that the loan on 401k is limited to $50K or 50% of the account balance, whichever is less.

In order to do a Solo 401k you need to qualify for it by having a small business without full time employees or generating self-employment income.

If you take the loan out, you just pay back principal + interest and personally keep all the gains, which you will be taxed on.

Edward C. · Answer

This is Great, thank you Loren, Jeff, and Doreen. Looks like the 401K loan is the way to go. Loren, the Deal is getting closer but not yet closed, and I'm strategizing funding options. I would be involved in planning the rehab, but the work will be a contracture.

From what I understand if I use the IRA, then all profit from this deal would also have to go back to the IRA, I'm thinking that a loan against a 401K would not have the same rules. Yes?

Doreen Chaisson · Answer

With a Self-Directed IRA, if it's a property the IRA is purchasing, the IRA would be able to get a non-recourse loan to either finance purchase or finance rehabbing.  The IRA, not the IRA owner, is the borrower and the IRA is responsible for making the monthly loan payments. This could be an issue if it's an unoccupied, non-income producing property.

Jeff Astor · Answer

Edward, the typical Self-Directed Solo 401k has a loan feature that would allow you to use the money for rehabbing your own non-retirement property. A Self-Directed IRA does not have such a mechanism.

Loren Whitney · Answer

@Edward C.  If your currrent 401(k) will allow you to take a loan out, that is one option for personal gains.

Do you already own the property being rehabbed? Also, do plan on doing the rehab work yourself? These are important questions if you plan to involve the IRA. Without knowing more, I'll just say that if this is already tied back to you personally in anyway, it would be best not to proceed with your self-directed IRA. If this is an arms-length investment that will require nothing more than decision making capacity, there might be an opportunity for the IRA to participate. Tell us more about the structure, who's involved, and what the end game looks like.