When people think about their 401k, they consider a lump sum of money that has been put away for retirement. In fact, most people completely forget about their 401k until income tax time. Creative real estate investors, however, have figured out that their 401k’s and real estate Investing have a mutually beneficial relationship.
So with that being said, you are probably wondering how a savvy investor can use one for the other.
The easiest way that 401k and real estate investing can work together is through the ability to take out a loan against a 401k. The primary objective with real estate investing is to use little or none of your own personal money to fund the investment. Since you are allowed to borrow against your 401k, you can use this to finance part of your investment. When the deal closes, you will receive the amount you borrowed and then some. You can then easily pay back the loan without affecting your 401k. So, basically, it’s like a short term loan you make against yourself. You have access to the funds needed for investing, it doesn’t technically come directly out of your pocket, and when you finally cash in your profits, you simply pay yourself back.
There are some things to note about this method of investing, however. First, you should know that there is a cap on the amount you can borrow against your 401k. This amount is usually $50,000. However, it can be less, depending on the amount of money you actually have in your 401k. Another thing to note is that the real estate you purchase through this method is not eligible for the mortgage-interest tax deduction. There are no tax benefits when you use 401k to finance a portion of any real estate related transaction.
Another option for is to put the money into an IRA, or individual retirement account. Sometimes this is not allowed, but it if is, you will have more flexibility on what you can do with the money. You might receive a penalty for moving your money from your 401K. However, the penalty is usually worth considering given the benefits you would receive through real estate investing. Just keep in mind, the main objective is to only borrower the money for a certain period of time. As you wrap up each deal, its imperative that you repay yourself, and only hold onto the remainder of the profit.
If you are weary of the risks involved, there is a safer way to invest in real estate by using your 401k. Some plans offer the option to invest in real estate investment trusts. These trusts consist of companies that buy and sell real estate, which is a much less risky way of investing in real estate. It also requires less work on the part of the investor since the trust companies are the ones actually doing the real estate investing.
Most people are unaware of the many possibilities that exist by using their 401k’s to invest in real estate. It is a creative way for investors to make a profit in real estate without actually using their own money. The best part about it is that there are both safe and risky ways of investing with this money to yield a profit. The decision you make is one entirely of personal preference.
Tabitha Naylor
http://www.articlesbase.com/non-fiction-articles/using-your-401k-for-real-estate-investing-72118.html
Investing my 401K in real estate?
I am considering changing jobs and was thinking about taking an estimated $100,000 out of my 401K and investing it into additional real estate. I presently have 3 income properties, two of which are free and clear but need about $20,000 in improvements and the other is occopied with an appraisal of $36,000 and an equity loan balance of $4,000.
In my targeted area, I can possible purchase two additional income properties and because I am a licenced contractor and doing all the work myself , I figure i’m saving money on the improvements.
I understand the penalties of cashing out my 401 K but also think there are some advantages to investing the money in real estate. I think I can increase my assets while making some additional money by using the money in my 401 k instead of trying to borrow from a bank.
Any advice on the advantages or disadvantages
Is it possible to create a company, roll the 401k into an IRA, and invest your IRA in that company’s stock? That way you wouldn’t pay the penalty.
I’m not sure if an IRA needs to be invested in publically traded stock but it’s worth looking into.
Edit: If you can’t do the above, it depends how much money is in your 401k, how much you will need for retirement, your current age, etc. Remember you’re taking a 10% penalty off the bat for removing $$ from your 401k, so you will need real estate returns of 11% above what you would get from your 401k in order to break even the first year.
Then again, if you can rent out the additional properties and increase your cash flow, they will pay for themselves while you reap the benefits of capital appreciation. With the housing market the way it is, you should be able to make purchases at very good prices. It’s a tough call and there’s not enough information to give you good advice.
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There are custodian for retirement funds which allow you to hold real estate. Try Pensco or Entrust. Or search on Yahoo or Google for self directed ira real estate.
You may not be able to improve the properties you already own but it is worthwhile to find out what your options are in regards to being able to shelter your retirement funds with real estate holdings.
If you cash out $100,000 from your 401(k), you will need to pay federal income taxes of whatever your income tax rate is (30%) plus your state income tax (6%), plus a penalty of 10% to the federal government for early withdraw.
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likely not worth it…besides the taxes and penalties you have to think about the lost interest that you would have. You’d be losing the compounding effect of $100,000. That’s HUGE! Very few areas of the country can provide the sort of return that you are looking at. Not to mention the fact that your retirement would be at the whim of the market….People in 90% of the country are finding that they can’t sell their property at a reasonable price let alone a profitable one. Now imagine that you are 60 and ready to retire early…but you can’t because the market is in a downturn. Equity markets turn around far quicker than real estate markets.
Not saying don’t invest in real estate…it’s not a bad option for some. But…it’s not the place for investing your retirement savings in….especially something so volatile as a single (or two) pieces of property.
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