You have amassed a nice nest egg through 401k plan contributions over the years. Now you are seeking to diversify into real estate, perhaps frightened by market downturns or simply seeing an opportunity for a sound investment. To convert 401k assets into real estate, you must roll over the funds into a real estate IRA. You must no longer be employed with the company maintaining the 401k plan to roll it over, and the real estate must be investment property exclusively to comply with IRS regulations.
Terminate employment. Whether you or your employer terminate employment, you must stop working for the company before you are eligible for a rollover.
Find an IRA custodian that offers real estate services. Your local bank or brokerage firm don't allow real estate investments in IRA accounts though they may be able to recommend you to a custodian that does. Pensco Trust, Entrust Group and Sterling Trust are nationally recognized for real estate IRA services.
Open the rollover real estate IRA at the new custodian. Obtain the new account information including account number, address where funds will be sent and contact information of your account manager.
Call your 401k plan administrator and request a rollover package.
Complete the rollover package paperwork using the new rollover IRA information in the section designated as a "direct rollover." Direct rollovers send funds to the new custodian instead of liquidating assets and sending you a check, known as an indirect rollover.
Submit the forms and wait four to six weeks for the funds to transfer.
Find the property you wish to purchase and instruct your IRA custodian to purchase it. If you don't have enough in the IRA to buy the property in cash, you will need to open an limited liability company that partners with your IRA. The LLC obtains the mortgage and is responsible for Unrelated Business Income Taxes resulting from the non-IRA percentage of income.
The IRS only allows investment property in IRA accounts. You, your spouse, children or grandchildren are not permitted to use the property in any way including but not limited to residing in it, vacationing at it or leasing it for business purposes. Sweat equity is also prohibited on the property. Hire someone to improve the house to remain in compliance with IRS rules.
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