How to Use Your 401K to Buy Real Estate: The Basics

One of the best ways to invest money long-term is by using your 401K to buy real estate. An Individual 401K account has become a popular way for Americans to fund their retirement and invest money tax-efficiently. A Qualified Small Business Retirement Plan, more commonly known as a QRSBP or “Q” plan, is a type of retirement plan that meets specific requirements set out by the IRS. Depending on where you work, you might be able to use your company’s Q plan to invest in real estate and other alternative investments. If not, establishing a Self-Directed IRA may be an option for you and your spouse. In this article, we’ll cover everything you need to know about using your 401K to buy real estate so that you can make the right decision for you and your family.

What is a 401K?

A 401K is a type of savings account that employees can contribute to via payroll deductions and invest on a pre-tax basis. Depending on the specific 401K plan your company offers, you can contribute up to $19,000 per year for individuals, $25,000 for those aged 50 or older. Your contributions are then deposited into a pre-tax retirement account where they can grow completely tax-free until you withdraw them at retirement. While most people think of their 401K as an investment account, this is only one of the many ways you can use a 401K to save for retirement. Your 401K can also be used to pay for expenses like college tuition, medical bills, or even a down payment on a house.

How to Buy Real Estate with a 401K

One way to use a 401K to buy real estate is to open an Individual 401K account. For this to work, you will want to make sure that your employer offers this type of plan and that you are an employee, not an independent contractor. Once your Individual 401K is opened, you can then invest in alternative assets like real estate, stocks, and bonds. To buy real estate with an Individual 401K, you will first need to find a real estate investment company that offers Q plans. These companies will help you find properties to buy and manage the whole real estate investment process. You will then want to open an Individual 401K and start contributing funds to it. Once you have accumulated enough money, you can then use the funds from your Individual 401K to purchase real estate.

Pros of Using a 401K to Buy Real Estate

– Tax-Free Gains – Your 401K contributions are made on a pre-tax basis, meaning that you do not pay taxes on the money until you start withdrawing it at retirement. Investing in real estate with a 401K allows you to make tax-free gains, meaning you can make more money than if you had invested the same amount in the stock market. – Low Risk Investment – Compared to most investment types, real estate is considered a low-risk investment. This means that your money is less likely to be lost due to external factors like economic downturns. Because real estate investing is less risky than stock market investing, it is also a good option for investors who are just starting out. – Liquidity – In general, it is easier to liquidate a real estate investment than it is to sell off stocks. This means that you will be able to use the money in your Individual 401K to buy real estate much more quickly than if you had invested in stocks.

Cons of Using a 401K to Buy Real Estate

– Taxes – While investing in real estate using your 401K will be a tax-free investment when you are contributing to the account, gains made when you sell off the real estate will be taxed as ordinary income. The amount you pay in taxes will depend on your overall income level and tax bracket. – Harder to Access Cash – Unlike stocks, real estate is not a liquid investment. This means that it can be difficult to sell off the real estate and access the cash you need.

How to Establish a Self-Directed IRA to Use Your 401K to Buy Real Estate

Another way you can use a 401K to buy real estate is to open a Self-Directed IRA and use that account to invest in real estate. You will want to make sure that your employer offers a Self-Directed IRA before you decide to open an account. An IRA is a retirement account where you can make tax-deferred contributions and earn interest on your money. You will first need to find a real estate investment company that offers Q plans and is willing to work with a Self-Directed IRA. This company will help you find the right properties to buy and manage the investment for you. Once you have found the right investment property and funds have been transferred to your Self-Directed IRA, you can then use the funds in your IRA to buy real estate.

Conclusion

Getting started using your 401K to buy real estate may seem complicated, but in reality it’s very straight-forward. If you work for a company that offers a Q plan, all you need to do is open an Individual 401K account and start contributing. If you work for a company without a Q plan, you can still open a Self-Directed IRA and start investing in real estate that way. Using your 401K to buy real estate is a great way to diversify your investment portfolio, increase your retirement savings, and make money tax-free.