Investing Your 401(k) In Real Estate

In the 10 years following college, I had 9 different jobs. I was always trying to find the right fit for me, from teacher to game designer to instructional designer to creative director.

Many of those jobs offered a retirement plan as a benefit, so I ended up with a graveyard of 401(k) money – a little bit here, a little bit there. Because I was in my twenties at the time, I continued to kick the proverbial retirement can down the road, figuring that I’d get to it all “someday.”

Luckily, once I discovered that I could roll my retirement funds into a self-directed 401(k) real estate investments and actually choose where and how I wanted to invest that money – that was my wake-up call. Financial freedom, here I come!

I discovered that it was fairly easy to roll idle 401(k) money into a self-directed IRA account and to start 401(k) investing into things like real estate syndications with it. The cash flow distributions would go right back into my self-directed account, and I could watch my retirement funds grow month by month.

Most people have no idea that you can use your retirement account to invest in anything other than the stock market. But with a little research (like reading this article) and ingenuity (taking action), you can use your 401(k) to invest in real estate and ensure you’re building a strong nest egg for your future.

And, if you invest strategically in growth markets, you also have the opportunity to grow your retirement savings at a rate much faster than through standard stock market investing. With careful planning, you could even achieve FIRE (financial independence retire early).

In this article, we’ll share what a 401(k) is, the best way to invest 401(k) funds, how and why you might want to invest your 401(k) in real estate investments like syndications, things to keep in mind before you do so, and more. So if you’re ready to take your retirement funds to the next level, read on!

What Is A 401(k)?

A 401(k) is a retirement savings plan sponsored by an employer. It lets you save and invest for your own retirement while taking advantage of unique tax benefits.

Investment Options – Can I Invest My Own 401(k)?

Most employers offer traditional 401(k) retirement plans with a limited array of investment options, including stocks, bonds, mutual funds, and index funds. Very seldom do you find employers offering more self-directed retirement plans that allow for alternative investments like real estate.

Because of that, very few people know that there’s an option to roll your 401(k) funds into self-directed 401(k) for real estate or other investments, which gives you much more freedom over the types of investments you want to make with your retirement funds.

If you have an old 401(k) from a previous employer, you can easily roll that into a self-directed account, which gives you much more control and flexibility into deciding how to invest those funds.

Income Tax Considerations

One of the biggest benefits that 401(k) plans offer is tax advantages, which can allow you to defer income tax until you reach retirement age.

Depending on how you structure your 401(k), you can either use 401(k) contributions to reduce your adjusted gross income and thus defer income tax, or you can pay income tax now, via a Roth 401(k).

While the latter option doesn’t provide an up front tax write-off, you can enjoy the growth without having to pay taxes down the road.

Annual Contributions

One thing to keep in mind is that the 401(k) does come with an annual contribution limit, which often changes from year to year. The limit depends on your age (the limit is higher if you’re over 50 years of age), as well as whether you’re a W-2 employee or business owner.

In addition, some employers offer matching contributions for 401(k)s, which can help juice up your retirement savings. For example, for every dollar you contribute up to a certain limit, your employer will match it. If this is something your employer offers, it’s definitely worth looking into.

401(k) Considerations – Using 401(k) For Investment Property

One thing to note is that a 401(k) is a long-term retirement account and shouldn’t be used as a short-term savings account. When you retire, you can use the money in your 401(k) to help pay for living expenses, healthcare costs, or other expenses, but prior to retirement, you won’t be able to access the money in your 401(k) without penalty.

However, that doesn’t preclude you from choosing how to invest and grow the money in your 401(k), as long as you follow the guidelines and don’t use the funds for personal use before you reach retirement age.

While many people invest their 401(k) funds in the stock market, those investments may not always be the best fit for your investing goals, particularly when you factor in age.

Alternative Investments Via Self-Directed Retirement Accounts

With a self-directed 401(k) or IRA, you can invest your money into real estate, foreign currency, precious metals, crypto, promissory notes, and much more.

Essentially, a self-directed retirement account gives you access to invest and grow this pot of money that you otherwise wouldn’t be able to touch until retirement age.

Since these retirement funds are money that you aren’t able to use for years or sometimes decades, it can be a lower risk way to try some forms of investing, including real estate, to determine whether they’re the right fit for you.

For example, you might test out investing in a real estate syndication via your self-directed 401(k) or IRA, see how it works, then invest additional capital (either cash or retirement funds) once you’ve built out a “proof of concept” and see that it’s working.

This can be a great way to gain more control over your portfolio, hedge against inflation, and ensure your 401(k) investments are growing for you as efficiently and effectively as possible.

Related: How To Protect And Have Total Control Of Your Retirement Plan

How To Invest Your 401(k) In Real Estate

If you’re looking for ways to maximize the growth of your 401(k) over time, real estate investments can be a great option. However, in order to invest in real estate, you’ll need to ensure that you have a self-directed retirement account (traditional 401(k) accounts are typically fairly limited on the types of investments you can make).

A self-directed 401(k) retirement account can be used to invest in a variety of different real estate investments, including rental properties and real estate syndications.

Investing In Real Estate Syndications

Passive investing through real estate syndications can be a particularly good fit for investing your 401(k) funds, as they require minimal active participation in the day-to-day management of the property and thus are very hands-off investments.

On top of that, real estate syndications often have a timeline of five years or more, which make them the ideal for retirement accounts, since those typically aren’t funds you need immediate access to.

Find A Self-Directed Custodian

To invest your 401(k) in real estate, you’ll want to first roll your funds into a self-directed IRA or 401(k). There are many self-directed custodians out there, so a quick Google search will point you in the right direction.

In particular, you’ll want to pay attention to fees (both upfront fees as well as ongoing annual fees), look into what types of investments you’ll be able to make, and learn what the process of investing will be with each custodian you’re considering.

For example, with property purchase documents, or a PPM (private placement memorandum) in the case of a real estate syndication, you’ll want to understand your custodian’s process for signing.

If you want our recommendations on self-directed retirement account custodians, you can reach out to us here.

Roll Your Existing 401(k) Into A Self-Directed Retirement Account

The rollover process usually takes some time (10 days to several weeks), so you’ll want to account for that. In other words, if you want to invest in an opportunity that’s closing tomorrow and haven’t yet started the rollover process, you may have to wait for a future opportunity.

Once you’ve completed your rollover, the world is your oyster! Your self-directed 401(k) will give you the opportunity you invest your retirement savings as you see fit, including into real estate investments.

Finding Investments For Your 401(k)

With a self-directed 401(k), you’re not stuck with traditional, pre-made mutual funds. You can mix and match stocks, bonds, and even assets like real estate investments to create a portfolio that suits your retirement goals.

A self-directed 401(k) really gives you the freedom and control to invest your retirement funds as you see fit, whether you want to try crypto or a real estate investment. This diversification and control can really help you maximize growth and ensure you reach your retirement goals.

When you put your 401(k) funds into real estate investments like syndications, particularly those with a value-add component, you have the opportunity to grow your funds through an real estate investment that’s independent of the greater market and thus could provide downside protection.

Just keep in mind that you may need to be an accredited investor to qualify to invest in certain syndications, and any returns (cash flow or proceeds from a sale) from investments made with your 401(k) need to go straight back into the retirement account, not to you, your trust, or any other entities.

In fact, most custodians will have a very specific way for you to make your distribution checks out to, to ensure they go directly into your retirement account.