How to Use Your 401(k) or IRA for Real Estate Investments Without Breaking the Rules

Saving for retirement is essential, but figuring out the best way to grow your savings can be confusing. Most people use their 401(k) or IRA to invest in stocks and bonds, but did you know you can also invest in real estate?

If done correctly, using your retirement funds for real estate can provide passive income, long-term appreciation, and portfolio diversification. However, there are rules and risks to consider before jumping in. Here are four ways you can invest in real estate using your 401(k) or IRA.

1. Invest in Real Estate Investment Trusts (REITs)

If you have a traditional employer-sponsored 401(k), you may not be able to buy physical real estate, but you can invest in Real Estate Investment Trusts (REITs).

REITs work like mutual funds—they pool money from multiple investors to buy and manage income-generating properties such as apartments, office buildings, hotels, and shopping centers. Some REITs are publicly traded, meaning you can buy and sell shares just like stocks.

Why consider REITs?

• You get exposure to real estate without owning physical property.

• Dividends earned grow tax-deferred in your retirement account.

• REITs provide passive income and diversification.

Check if your 401(k) plan offers REITs as an investment option. If not, you may be able to invest in publicly traded REITs through an IRA.

2. Open a Self-Directed 401(k) or IRA for Real Estate

A self-directed 401(k) or IRA (SDIRA) gives you more control over your investments, allowing you to put your retirement savings into real estate. Unlike traditional retirement accounts that limit you to stocks and bonds, a self-directed plan lets you invest in:

• Residential and commercial properties

• Rental properties

• Land purchases

• Real estate partnerships

However, there are strict IRS rules you must follow:

• No personal use – You can’t live in or use the property.

• No transactions with family – You can’t buy from or sell to close relatives.

• All expenses and profits must go through the account – Rent, property taxes, and maintenance must be paid from your SDIRA.

Self-directed retirement accounts require a custodian to manage transactions. Not all financial institutions offer these, so you’ll need to find a specialized provider.

3. Borrow Money From Your 401(k)

If your 401(k) plan allows loans, you can borrow from yourself to invest in real estate. Here’s how it works:

• You can borrow up to $50,000 or 50% of your account balance, whichever is lower.

• You must repay the loan within five years (or sooner if you leave your job).

• Interest payments go back into your 401(k), so you’re essentially paying yourself.

Risks to consider:

• If you don’t repay the loan, it becomes a taxable distribution, and you may owe a 10% penalty if you’re under 59½.

• You miss out on potential stock market growth while your money is out of the account.

• If the real estate investment underperforms, you could lose money while still repaying the loan.

4. Withdraw from Your IRA for a First-Time Home Purchase

If you’re looking to buy your first home, you may be able to withdraw funds from your IRA without penalty. The IRS allows first-time homebuyers to take out up to $10,000 from a traditional or Roth IRA for a home purchase.

Important details:

• If using a Roth IRA, your account must be at least five years old to qualify.

• You’ll still owe income taxes on the withdrawal from a traditional IRA.

• This exception applies only to IRAs—401(k)s do not qualify for this early withdrawal benefit.

While $10,000 might not cover an entire down payment, it can help with upfront costs when purchasing your first home.

Is Real Estate a Smart Retirement Investment?

Investing in real estate with your retirement funds can be a great way to build wealth, but it comes with challenges. You need to follow IRS rules carefully, consider the risks, and ensure you have a solid financial plan.

Before making any moves, consult a financial advisor or tax professional to make sure real estate investing aligns with your long-term retirement goals.

Also Read: A Growing Number of Americans Achieve 401(k) Millionaire Status

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