As a fresh graduate starting a career in the US, contributing to 401k retirement account is always encouraged. However, the investment options in 401k are usually limited to stocks, bonds and mutual funds. For investors who want to allocate a portion of their retirement savings to real estate, using 401k funds to invest in real estate takes some extra planning. There are a few strategies to unlock the potential of 401k funds for real estate investment. This article will explore strategies including 401k loans, self-directed 401k, real estate IRA rollover, and REITs that can help you invest your 401k into real estate with Fidelity.
Using 401k loans to fund down payment on rental properties
The easiest way is taking a 401k loan to fund down payment on rental properties. 401k loans allow you to borrow against your own contributions. The amount you can borrow is usually limited to 50% of your vested balance or $50,000. The loan needs to be paid back with interest over 5 years. While you don’t have to pay income taxes, missing payments can result in taxes and penalties. Taking 401k loans can be risky but does provide short-term access to funds for real estate opportunities. Consult with a financial advisor to evaluate if it aligns with your investment goals.
Rollover 401k to self-directed IRA for more flexibility
For investors wanting more control over their real estate investments, a self-directed IRA provides the flexibility to invest retirement funds directly into specific properties. When changing jobs, 401k funds can be rolled over to an IRA account. A self-directed IRA then allows investing in alternative assets like real estate, private equity, and precious metals. Companies like Kingdom Trust, Alto IRA, and Equity Trust Company offer self-directed IRA options. Be aware of prohibited transactions like using IRA funds to buy property you or relatives live in.
Invest in REIT ETFs for diversified real estate exposure
If you want real estate exposure without the hassles of being a landlord, REIT ETFs provide a diversified, low-cost and liquid option using 401k or IRA. REITs, or real estate investment trusts, are companies that own and operate real estate properties and trade like stocks. Popular REIT ETFs like VNQ and SCHH hold portfolios of REITs across residential, retail, office and other types of properties. With a single purchase of a REIT ETF, you can gain exposure to hundreds of real estate properties and receive steady dividends.
While 401k accounts limit investing in physical real estate, options like loans, IRAs, and REITs allow allocating retirement funds to real estate in different ways. Assess your risk appetite, desire for control, and goals to pick the right strategy for your needs.