Buying property or real estate with an IRA, 401k, 403b, 457b or other retirement plan
Very few people know that they can actually use their retirement funds to purchase real estate and or property to hold as an investment. The fact is, there are great deals to be had right now, much more in real estate than even the stock markets, and most people don’t even realize they have this money available for this use. This article will explore the various nuances with regards to investing in property with your retirement funds and how to go about doing so if you so decide.
There are very big differences in investing with IRA money and 401k money, below we will help you better understand what they are and what to watch out for to prevent tax issues from undermining your profits.
First, let’s talk about someone who is currently working for an employer and they have a chunk of money to work with in their 401k plan. In most cases, employer plans forbid you from cashing out your entire plan- and the only way to access your money for reasons other than hardship is to take out a loan against your money. In essence, the plan will lend you your money at a really reasonable interest rate – currently anywhere from 4% to around 5.5% and payroll deduct your payments to pay for the loan. The process is fairly quick and you can typically have the proceeds within 10 days. The problem being, their are limits to the amount you can withdrawal (most companies only allow you to withdraw 50% of your vested balance) and often no more than $50,000. Ultimately, purchasing real estate property by a loan through your 401k plan is not nearly as flexible as purchasing through an self directed IRA (which we’ll talk more about below). There are other restrictions too, but these apply to all investments and this relates to your not being able to use the property as a residence of your own. Not to mention, your subsequent real-estate purchase won’t be eligible for the mortgage-interest tax deductions.
Now, if you have an old 401k plan from a former employer, you can easily roll that over into a self directed IRA and begin purchasing your investment property and have access to all your money – versus the restrictions placed on those whom are actively participating in their firms 401k.
An alternative for those in 401k plans is to invest (if offered) in real estate investment trusts also known as REITs.
Some companies will allow you to roll your existing 401k money over to an IRA, however, you will have to pay a 10% penalty if you don’t meet the age requirements.
Now, for those people with IRAs, you should be able to move them into a self-directed IRA, however, sometimes this is more complicated than you would like – so make certain you really have a great buy before going through the hassle. As mentioned, the process you would need to complete entails moving your IRA funds into a self directed IRA and choosing a special independent “IRA custodian” that handles these matters.
Not only can you invest in real estate, but also you can gain the ability to invest in private corporation offerings and the like. You should certainly compare the costs in your local area to better understand what type of custodian works best for your needs. It surely doesn’t make sense to pay for more than you’ll use.