Whether you have just recently changed jobs or have already retired, you may find that you have a considerable amount of assets in your 401(k) plan. If you're interested in investing in real estate, it's possible to perform a conversion of funds in real estate by moving your 401(k) assets over to a self-directed IRA. Here's a more comprehensive guide on how to perform a 401(k) real estate investment.
Create a Self-Directed IRA
First, it's important that you create a self-directed IRA, which is a type of individual retirement account that's available from many IRA providers. This account can be a traditional, Roth or SIMPLE IRA, and you'll want to consider the tax consequences of your choice.
Keep in mind that a self-directed IRA is one that's managed by the account holder, and according to the IRS, you can hold numerous types of alternative investments, including everything from precious metals to real estate.
Transfer Your Funds With a Rollover Option
If you're using your 401(k) to buy an investment property, you must first change your 401(k) plan to a self-directed IRA, which can be done with a few rollover options.
- Direct Rollover: This type of rollover allows for the 401(k) assets to be transferred directly to the self-directed IRA provider. This transfer will come in the form of a check that's payable to the self-directed IRA provider. Taxes aren't withheld from the total rollover amount.
- Indirect Rollover: If you receive your 401(k) assets from your plan administrator before the funds are sent to your self-directed IRA provider, around 20 percent in taxes is going to be withheld before you're given the check. In this situation, your assets need to be deposited in your IRA within a period of 60 days. Otherwise, the IRS says the full amount is taxable.
Buy Real Estate With 401(k) Funds
You're now ready to continue making a real estate investment with your former 401(k) funds, now transferred to the self-directed IRA. When you want to cash out that IRA to buy real estate, all that's required is for you to pay for the home with your IRA. None of the money you put into the investment can come from your personal funds if you want to defer taxes.
- Enter a partnership. A partnership occurs when other sources provide cash to help fund the transaction. It's possible to partner with another person's IRA or their personal assets. Once a purchase is made through a partnership, all expenses and profits will be divided in accordance with the ownership percentage.
- Establish an LLC. This process involves creating a limited liability company (LLC) with funds from your IRA, after which the LLC could be used to purchase the property. Your investment would then be held under the LLC name. This option is referred to as a checkbook IRA since you'll have full access to the IRA funds with a checking account.
- Purchase real estate directly. If you have access to enough assets from your 401(k), you can purchase real estate directly by paying for the entire property with your self-directed IRA account. By using this IRA, the investment will be made entirely in cash. This is the easiest way to buy real estate with your 401(k).
Now that you understand how to use your 401(k) to buy a house, you should know what the next steps are in this process. Real estate has been a great investment for many years and typically provides investors with consistent returns. Once you cash out your IRA to buy real estate, you can use these funds to purchase any type of property.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.