Investing in real estate can be a great way to diversify your portfolio and create long-term wealth. But did you know that you can use your 401K to invest in real estate?
This article will discuss the basics of using a 401K to buy an investment property, including the rules and regulations you need to know before taking the plunge. Read on to learn the specific details.
Yes, You Can Invest In Real Estate With Your IRA Or 401(k)
When you create a self-directed retirement account and use it to invest in real estate, you have more control over your future financial security. This type of account allows you to choose which investments you want to make and when. Plus, any profits from these investments are tax-deferred until retirement age.
Using A 401K To Buy Investment Property
Generally speaking, using a 401K to buy investment property is possible in various scenarios, including residential properties, commercial properties, and land. However, there are certain restrictions on what types of properties are allowed for investment purposes.
For example, vacation homes or rental properties used for personal use require specific considerations regarding fees and taxes. So it’s important to do diligent research to understand the specific legalities in your situation.
Should You Use Your 401(k) Or IRA To Invest In Real Estate?
An excellent real estate investment for a retirement account takes advantage of tax benefits. Two great choices for investing in real estate through a retirement account are an IRA or a 401(k).
Both offer tax advantages and allow investors to diversify their portfolios with alternative investments like real estate. However, some critical differences between the two accounts should be considered before making an investment decision.
Using Your 401K For Real Estate Investing – AB Capital
If you want to use your 401k account to invest in real estate, you must use a solo 401k plan. A solo 401k requires account owners to make all investment decisions without relying on outside advisors or brokers.
This means that all transactions must be made directly from the solo 401k bank or brokerage account – never pay expenses with personal funds, as IRS rules prohibit this. All income generated from the investments must also be deposited into the same solo 401k bank or brokerage account.
How Can I Invest My 401K In Real Estate?
A 401K is one of the few accounts that can legally own standard or rental real estate as long as the rules are followed. Because most people have a managed fund within their traditional employer-sponsored plan, they cannot access these funds until they reach retirement age.
However, if they roll over their funds into an IRA, they will gain access immediately. Still, they will lose some tax advantages associated with traditional plans, such as pre-tax and employer-matching contributions (if applicable).
Using A Self Directed 401K Or IRA For Real Estate Investment
When making an offer to purchase an investment property using either type of retirement plan (IRA/401K), make sure that the offer is made in either plan’s name, not yours. Otherwise, according to IRS guidelines for these plans, it may not qualify as an allowable transaction.
Additionally, always keep records of all transactions related to any purchase made with either method; this includes receipts, invoices, contracts, etc. Finally, always consult with a qualified tax professional before making significant financial decisions involving either type of plan.
Solo 401K Real Estate Investment Procedures
Investing in real estate using a Solo401K is relatively straightforward, but necessary steps must be taken before closing any purchase.
- Identify potential properties that meet your criteria and those outlined by IRS regulations governing these plans.
- Obtain approval from the custodian/trustee allowing purchase; many custodians/trustees require additional paperwork, such as appraisal reports, before approving any transaction.
- Once approved, open escrow; all fees associated with escrow must be paid from the Solo401K bank/brokerage account; never pay expenses with personal funds as prohibited transactions disallow it.
- Close escrow; once closed, transfer the title into the name of Solo401K trust.
- Manage property; all income generated by the property must be deposited back into Solo401K bank/brokerage account.
All expenses of the managing property must also come from the same Solo401 K bank/brokerage account.
How To Invest In Real Estate With Your IRA & 401 K & Pay Less In Taxes
One way investors can take advantage of low taxes when investing through their IRAs /401Ks is by utilizing strategies such as 1031 exchanges which allow them to defer capital gains taxes when exchanging one like-kind asset for another like-kind help (i.e., trading one rental property for another rental property).
Another strategy involves utilizing cost segregation studies which allow investors to break down specific components within buildings into shorter-life assets thus allowing them to accelerate depreciation deductions on those assets. Lastly, investors may consider utilizing passive loss limitations, which limit how much passive losses they may deduct against other non-passive income sources such as wages, salaries, etc.
Real Estate Investing With Your 401 K – Royal Legal Solutions
The most basic option is a solo 401 K cash purchase where only funds from the 401K are used towards purchasing a property. Other options include tenants in joint TIC arrangements where multiple investors pool money to buy a single property. Additionally, there s an alternative to setting up a limited liability company LLC where the investor contributes cash toward purchasing a single piece of property.
At the same time, the LLC serves vehicles holding title ownership. Lastly, there is an option for setting up an irrevocable trust whereby the investor contributes money toward purchasing a single piece of property. In contrast, the trust helps the vehicle holding title ownership.
Tips For Using A 401k To Buy Investment Property: Wrap Up
By following these tips and understanding how each type of retirement plan works best for different investments, you can confidently begin using a 401k to buy an investment property. Please note that this article is purely informational and not intended as legal advice. Please consult qualified professionals before making significant financial decisions involving either plan.