With the rising housing prices, more and more people are considering investing in real estate for better returns. However, real estate investment requires a large amount of capital. For young professionals who have just started their 401k plan, is it possible to use the money in 401k account to invest in real estate? This article will explore different strategies to utilize 401k funds for real estate investment.
Rollover 401k to IRA account for more flexibility
The easiest way is to first rollover the 401k balance to a Traditional IRA account after leaving the company. Unlike 401k which has limited investment options, IRA accounts allow investing in broader assets with lower expense ratios, including real estate crowdfunding platforms and REIT ETFs. Once the assets are in IRA account, they can then be used as down payment for rental properties through IRA LLC.
Take out 401k loan to come up with down payment
Another approach is taking out a 401k loan directly while still working at the company. Instead of cashing out which incurs tax penalty, the 401k loan allows borrowing up to 50% of the vested balance for up to 5 years. This preserves the tax-deferred status. The loan plus personal savings can then be used to come up with the down payment for real estate purchase.
Early withdraw with penalty for fixer-upper properties
For handy investors looking to purchase fixer-upper properties, they can consider taking early withdraw from 401k account to rehab and flip the properties for profits, despite having to pay the 10% penalty plus income tax. With sound calculations and conservative estimates, the fixing-and-flipping profits may justify the 401k withdrawal penalty.
In summary, while 401k is intended for retirement savings, there are ways to utilize the funds for real estate investment by either rolling over to IRA, taking out loan, or early withdraw with penalty.