First deal - looking to use a 401K loan

[Eric Thornton]

I am looking to make my first investment in commercial real estate. In doing a lot of research here on BP and elsewhere, there is so much information regarding using 401K's and self directed IRAs for real estate down payments. I need some $'s for a down payment (no more than $50K). My CPA told me that using a self directed IRA would limit my ability to invest in the property to the annual contribution limit. Also, I can't take any money out before qualified retirement. Additionally, the administrators of the self directed IRAs tend to charge high fees.

Would a personal loan from my 401K be a better option? What are the limitations with that beyond the $50K limit. Is this allowable for an investment property owned by my LLC? Any help/advice would be appreciated!! Thank you.

[George Blower]

@Eric Thornton

Good questions. Yes the 401k participant loan proceeds can be used for any purpose since the funds borrowed from the 401k are no longer deemed 401k funds once they have been borrowed. You will want to confirm your current employer 401k plan allows for 401k participant loans (most do). 

To learn more about the 401k loan rules, see the following: 

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

One of the differences between investing the 401k participant loan proceeds in real estate vs doing it in an IRA is the IRA won't own the property so it won't subject your investment to the IRA rules. Most of the same rules apply if you were to purchase the property through a solo 401k plan--that is, the property would be owned by the solo 401k plan.