401k converted to IRA; oops?

[David R.]

I worked at a company that had a good match for 20 years or so and built up a sizable 401k. When it was sold I converted the 401 k to an IRA. This allowed me to have better investment choices and lower fees, and also create a self directed IRA that I could invest in real estate.

However, I have now recently discovered that one can loan themselves money through the 401k at interest (so your 401k gets larger with interest and you get the liquidity). You are your own bank. The advantage of buying this way versus a self directed IRA is that you can avoid all the self directed IRA shortcomings such as

You cant directly fix up the place or do any improvements yourself

You or any relative can’t stay in the place (if it’s a vacation rental, it’s nice to stay there plus it lets you know the quirks/updates that could use your attention that you’d never have realized unless you spent the time there)

Also if it appreciates say 300k to 600k, to extract the property out of the IRA you must pay tax on the new appreciated price.

Am I missing anything here? I think as far as retirement accounts, most use self directed IRAs for investing, but likely not for places they’d ever want to stay or live in.

[Brian Eastman]

@David R.

You can only borrow the lesser of 50% of your plan value or $50K from a 401(k) or similar qualified plan.

While you are paying the plan back interest when you take such a loan, the rates are typically pretty low.  You have to look at that opportunity cost for the plan.  Could it be earning more than you are paying in interest?

You do not get to write off the interest you pay to your own 401(k) plan on the project side.

There are lots of ways you can put your self-directed IRA to work that will consistently outperform what a normal 401(k) will do: private lending, real estate syndicates, direct ownership of rentals, etc.