Many people want to invest in real estate “if I could only find the cash for the down payment on a property or two.” But for many would be investors – the answer to getting started in direct real estate investment is right under their nose: You can use a self-directed 401(k) to invest in real estate.
If you don’t own your own company (so you can become the sponsor of your own 401(k) plan, you have a couple of options:
Borrow. If your plan allows, you may be able to borrow up to $50,000 or 50% of your account value (whichever is less) to invest in real estate in a taxable account. If you go this route, understand you only have five years to repay the loan. Otherwise it’s considered a taxable distribution and if you are under age 59½, may generate penalties to boot.
Execute a Rollover. If it’s a 401(k) from an old employer, or if your plan allows in-service rollovers, you may consider rolling over some or all of your 401(k) balance to your own IRA. There you have a couple of options: You can pay income taxes on the rollover and start a Roth IRA (thereby gaining the advantage of tax-free growth forever in exchange for a near-term tax hit), or continue with the tax-deferred approach.
In this case, in a traditional IRA, your real estate investment will (hopefully) grow tax-deferred. Rental income is also tax-deferred – just reinvest it within your IRA until you are ready to take distributions. Required minimum distributions, of course, still apply starting April 1st of the year after the year in which you turn 70 ½. Distributions are taxable as ordinary income. Any gains attributable to money borrowed from outside the IRA may also be taxed under unrelated debt-financed income tax rules.
In the case of a Roth IRA, since you already paid income taxes on the money, growth and rental income are tax-free, as long as the money remains in the Roth at least five years. There are no RMDs to worry about either.
If you own a business
If you own your own business, setting up your own self-directed solo 401(k) for the purposes of owning investment property may be a compelling option for several reasons:
For more information, visit us online at www.americanira.com, or call us for a free consultation at 866-7500-IRA(472).