As more people realize the value of real estate investing for building long-term wealth, using retirement accounts like 401k to fund real estate purchases has become an increasingly popular strategy. Reddit forums and Fidelity articles provide some great tips on how to tap into your existing 401k to buy rental properties or REITs. There are a few main methods to leverage your 401k – taking out a 401k loan, doing a 401k withdrawal, or rolling over your 401k into an IRA with more flexibility. Each approach has its own pros and cons regarding taxes, penalties, risk levels, and investment options. Understanding the key differences is crucial to make sure you use your 401k wisely without jeopardizing your retirement savings.
Take out 401k loan to use as real estate downpayment
One of the most common ways redditors discuss about using 401k for real estate is taking out a 401k loan. Most 401k plans allow you to borrow up to 50% of your vested balance or $50,000, whichever is less. This allows you to come up with a decent downpayment while avoiding early withdrawal penalties and taxes. Just be aware that if you leave your job, the loan may need to be paid back in 60 days. There are also limits on how many loans you can have active at once. So evaluate your job security and budget carefully when borrowing from your 401k.
Roll over 401k into IRA with more investment options
Another popular route is to roll over your existing 401k balance into a Self-Directed IRA (SDIRA) after leaving your employer. This converts your 401k into an Individual Retirement Account with much more flexibility on alternative asset investments like rental properties. Certain custodians like Equity Trust Company specialize in SDIRAs, allowing things like buying houses to collect rental income. Keep in mind there are more rules and reporting requirements when your IRA owns real estate.
Take early 401k withdrawal to invest in REITs
If you want to tap into your 401k balance to invest in real estate but don’t want to deal with physical properties, a simpler option is using your 401k funds for REITs (real estate investment trusts). REITs allow you to invest in portfolios of various commercial/residential real estate to collect rental income and appreciation gains in a stock-like vehicle. You’d need to take the 10% early withdrawal penalty and pay taxes to access your 401k prior to age 59.5. But the hands-off approach and liquidity of REIT investing makes it attractive for those seeking real estate exposure in their retirement accounts.
In summary, the most common ways to leverage your 401k for real estate are through loans, rollovers into Self-Directed IRAs, or early withdrawals to invest in REIT stocks. Each avenue has varying tradeoffs in terms of taxes, control, risk levels and liquidity. Evaluate your personal financial situation to land on the best 401k/real estate combination for your investment needs and retirement goals.