Using Your 401(k) to Buy Investment Property

401(k)s can help you become a real estate investor.

401(k)s can help you become a real estate investor.

401(k) retirement accounts let you have money taken out of your paycheck so that you can save for your golden years. One of their key benefits is that the money comes out before taxes do, unless it's a Roth 401(k), so you effectively get to spend less to save more. While many 401(k) accounts offer limited choices of investments, there are ways that you can use your 401(k) to invest in properties.

401(k) Investment Choices

You might have investments in real estate in your 401(k) without realizing it. Some 401(k)s include real estate investment trusts, mutual funds or even direct ownership in buildings as part of their holdings. While you aren't owning a building yourself, you are participating in the investment property market indirectly. If you have the ability to choose your own investments from a broad-enough pool, you can look for ones that are tied to real estate or buy your own shares in real estate investment trusts, funds or even in companies that are tied to the real estate industry.

Self-Directed Accounts

If you have a self-directed 401(k) account or can roll over your funds into a self-directed account, you will have more latitude to choose your investments. With a self-directed account, you get the opportunity to put just about any investment you want into your 401(k), including investment property. While using a self-directed account to buy real estate can be complicated, if you follow the Internal Revenue Service rules, you can do it. One of the key requirements is that the property truly be an investment -- buying a beach home as an investment and spending a week annually in it for vacations won't work.

401(k) Loans

Another way to use your 401(k) to buy investment property is to take out a loan from it. If your employer allows it, you could borrow up to half of your balance, or $50,000 from your 401(k), whichever is less. You can then use that money as a down payment on an investment property. If you do this, though, you have to pay the money back within five years and, while you'll essentially be paying the interest to yourself, your money will be taken out of the other investments in your 401(k), so your returns could suffer.

Cashing Out

If you don't want to or can't transfer your money to a self-directed account, you could also cash out your 401(k) and use the money to invest in real estate if your employer will let you. Doing this, though, can be expensive. You will have to pay taxes on the money that you take out, and if you're under age 59 1/2, you will also have to pay an additional 10 percent penalty unless you meet certain exceptions.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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