How can I use my 401k to invest in real estate?

Question

I have a 401k with fidelity that I have been contributing to for 8 years now. I have built up a good amount of money in this account. The ultimate goal is to quit my W-2 and live off of passive income. Which means my 401k will just sit there until I am in my 60’s. Is there any way I can use those funds to purchase rental properties? I feel like I can make that money way more valuable in the real estate world.

Dmitriy Fomichenko · Answer

Matthew,

You won't be able to access your 401k while you are employed there. When you quit your job - you will be able to rollover your 401k into self-directed IRA and invest in rental properties or other alternative investments.

Retirement funds are designed for your future benefits, at retirement. However, there are some loopholes to access those funds early... @Mindy Jensen and @Scott Trench just did a podcast on this topic, you must check it out if you wish to have access to your IRA early:

https://www.biggerpockets.com/renewsblog/biggerpoc...

Kevin S. · Answer

@Matthew Powell A couple people have mentioned the ability to take a distribution (though you have to pay taxes and the 10% penalty) HOWEVER you must check your 401k Plan's rules (typically you can request either an abbreviated version or the full Plan Document from your HR department) to see if it allows this. Usually the only type of distribution you would qualify for (since you're under age 59.5) would be a hardship distribution for a homebuyer, however I believe you can't own any other houses/properties at the time of the withdrawal and it must be owner-occupied. Additionally some plans don't allow for hardship distributions (or even loans for that matter) and if your company's plan is set up like that then you're out of luck.

Brian Eastman · Answer

@Josh CollinsActually, what you are referring to is not really a self-directed IRA, but rather a Rollover as Business Startup or ROBS plan.  That is a very different structure with a different purpose, which is tapping into existing retirement savings to capitalize an active business in which you are directly involved.  This program is commonly used to purchase franchises, or to form active real estate development companies (new home construction, significant volume flipping, etc).  While you can have your retirement plan become a shareholder of your business, the business itself operates in the taxable realm.

A self-directed IRA is a purely passive means of deploying tax-sheltered retirement savings more broadly than just common financial products, but is still very much an IRA, with very hands-off approaches required.  The IRA is investing in real estate, mortgages, etc., instead of just investing in shares of stocks, bonds and mutual funds.

George Blower · Answer

@Matthew Powell

A good way to grow your retirement funds is by investing them passively in real estate so you could transfer the 401k funds to a self-directed IRA.

All the gains and expenses would flow trough the IRA. The following IRS page confirms that IRAs can be invested in real estate.

https://www.irs.gov/retirement-plans/retirement-pl...

You will need to use a self-directed IRA custodian like IRA Services  Trust Company for the self-directed IRA since not all IRAs custodians  offer an IRA that can be invested in real estate.

Kevin S. · Answer

@Roger Steciak Typically the only in-service distributions plans allow for are 1) hardship distributions, and 2) Age 59.5 distributions. Neither of these are required to be part of a 401k plan so some allow them, some don't. But in @Matthew Powell's case I highly doubt he'd be able to do an in-service rollover as they are only for people over the age of 59.5, however there are exceptions. Every once in a blue moon you see a Plan with a service requirement instead of age requirement (i.e. you can do an in-service withdrawal after 5 years of service) but again those are rare.

Justin Windham · Answer

@Matthew PowellThe prohibited transaction rules (such as self-dealing) do not apply to funds that you borrow from your 401k. You may use those funds as you wish. Only a direct investment of 401k (or IRA) funds would be subject to those rules.

Sherwin Gonzales · Answer

@Matthew Powell, great discussion to start as I am also interested in how to use my 401k to invest in real estate. I concur with @Mike Lauer's post in that you can take a 401k loan which is different from taking a distribution. By taking a loan, you avoid paying taxes and penalty fees. This might be a good strategy especially if you don't plan on leaving your job any time soon. You do however, have to pay back the loan if you leave or get fired from your job. You also have to pay interest on the loan, but you are essentially paying yourself back, which I believe the interest is a tax write off? Not sure if that's still allowed with the new tax law. Hopefully someone on this forum and can confirm.

You can use the loan to BRRRR where you can get a property to rehab and refinance to pull your initial investment out, pay back the 401k loan, and rinse and repeat! In hindsight, I wished I done this with my primary home. I purchased a 3/1 home with only 5% down. I since added a bathroom, making it a 3/2, got it re-appraised, was able to do a cash out refinance and pulled my initial 5% down out. Had I used a 401k loan, I wouldn't have used any of my money in my savings and could just recycle the money from my 401k. Essentially getting a deal w/ no money down!

Good luck to you and keep us posted on what you plan to do!

Steeve Breton · Answer

Love this thread.  I'm currently investing a sizable SD Roth IRA in Syndications and a few Notes here and there.  All passive.  Would love to find a way for it to pay me personally without "Self Dealing".

@Josh Collins I'm no expert but still seems like Self Dealing if your IRA is invested in a Corp that you draw a salary from.  Maybe you can "get away with it" but if the IRS sniffs it out they'll likely say you're personally benefiting from an investment made by your IRA.  Then your IRA is disolved, you pay all your back taxes and a heavy fine to boot.  Not worth it IMHO.

@Matthew PowellI'd talk to @Dmitriy Fomichenko or @Brian Eastman about setting up a Solo 401k?

Josh Collins · Answer

Most of the uses for an SDIRA surround an active business use for the funds.  You have to set up a C-Corp and invest your rolled over SDIRA funds into the C-Corp's private company stock.   Now you are a stock holder.  With that, you can still pay yourself a salary for running or working at that company that your SDIRA now holds as an investment.  So, to cut to the chase, you can make money (through W-2 income, not in the traditional passive income fashion that is associated with most RE) if it's a business expense.

Now, onto real estate investing with those funds.  I think you could legitimately use your SDIRA to buy land and have someone plant trees and have them harvested every 10 years, you could invest in a syndication where someone else manages the properties, or you might be able to get away with buying a self-storage and getting paid a reasonable salary to run it.  So there are ways to make money from an SDIRA, but only investing in syndiations is truly passive, but you can't take a salary or get paid without a penalty until you are of retirement age.  I would say talk to your roll-over specialists, but you might be able to pay yourself for managing a real estate business (as previously mentioned, self-storage comes immediately to mind).

For an example (not really real estate related but I'm hoping it helps a little), I was looking at buying a business with SDIRA by jumping through the necessary hoops ($5K and $130/mo maintenance fee).  Then I would work there and get paid a W-2 income.  Profits could then get rolled back into the business as seen fit.  However, once you've made a $1 in your business, your business is welcome to invest that dollar anyway it sees fit.  The term the specialist used was secondary investment.  So you're allowed to invest in passive investments with the income you've generated from the business.  I thought this was an interesting point.  I don't know if you can make income today with that passive investment or manage it yourself, (I'm guessing no and yes, respectively) with the secondary investment, but it's a question you could ask a specialist if you got to that point.

I love this idea in that you find a good, cheap business that throws off cash and you use it to invest in real estate assets.  You pay yourself with the business and the real estate assets make you a bunch of money upon retirement and grow tax free until you retire.  It's like a 1031 without having to exchange.

The experts out there are free to chastise or correct me as I think it's great to discuss options for this money if you're planning on quitting your day job prior to age 65 (or is it 67, or is it 67.5?  Whatever).  I recently quit my day job and honestly a 401k is doing me absolutely no good between now and 65/67/67.5!  ha!  So I'm exploring ways to make that money work harder for me and provide some sort of monthly income.

How can I use my 401k to invest in real estate?

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