How To Use Your 401k To Invest In Real Estate


I wish I could enjoy some of my retirement assets BEFORE I reach retirement age. You never know if I’ll still be healthy enough to enjoy it by then.”

This was a comment from a new Passive Investors Circle member BEFORE she learned about self directed retirement accounts.

Here’s another one:

Jeff, I’m only a few years out of school and even though I’m considered an accredited investor, it would be difficult to come up with the minimum investment of $75K on most of the deals you invest in. Any other suggestions?”

If you’re someone that wants to access your “locked up” retirement funds to invest in assets other than what the stock market provides, I’ve got good news for you. 

You can use both your 401k and individual retirement account (IRA) to accomplish this by investing in assets such as real estate.

Also, contrary to popular belief, you can do so without suffering from exorbitant withdrawal penalties.

Here’s what you need to know about using retirement accounts to invest in real estate…

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What Are Self Directed Retirement Accounts?

Self-directed 401(k) and IRA accounts allow savers to decide how to invest their pre-tax retirement contributions.

The majority of the time you only have access to pre-approved funds typically offered by employers.

Here’s the two main types we’re going to discuss today:

What Is a Self-Directed IRA?

Here’s a video to explain exactly what a self-direct IRA entails:

YouTube video

According to Investopedia:

A self-directed individual retirement account (SDIRA) is an individual retirement account (IRA) in which the investor is in charge of making all the investment decisions. Although the account is administered by IRA custodians or a trustee, it’s directly managed by the account holder—the reason it’s called “self-directed.

The main difference between a SDIRA and a Roth or Traditional IRA is that the SDIRA provides the investor with greater opportunity for asset diversification outside of the traditional stocks, bonds, and mutual funds.

For example, funds in a SDIRA can be used for:

  • Real estate
  • Undeveloped or raw land
  • Promissory notes
  • Tax lien certificates
  • Gold, silver and other precious metals
  • Cryptocurrency 
  • Water rights
  • Mineral rights, oil and gas
  • Livestock 

The Custodian or Trustee

A self-directed IRA is not a plan you manage completely on your own as you’ll need a trustee custodian to administer the account.

Examples of this would be a bank, or other entity approved by the Internal Revenue Service. These groups would be responsible for record keeping and IRS reporting requirements.

Pros and Cons Of a Self-Directed IRA

3 Pros of a SDIRA

#1 Tax advantages

Usually when real estate is sold, you have to pay capital gains tax. Many times investors will purchase real estate via a SDIRA for the tax benefits it can provide.

By using a SDIRA, the taxes are delayed and your contributions can grow tax-deferred.

Even better, Roth SDIRAs contributions can be withdrawn tax-free upon retirement.

#2 Alternative investments

As previously mentioned, when investing with traditional retirement accounts, you’re limited to investing in only what the stock market can offer.

Using a SDIRA opens you up to a much broader pool of assets to choose from such as real estate.

#3 Provide an extra layer of protection 

You may not have realized that any funds in a SDIRA are protected from creditors.

If something should ever happen to you where you have to file bankruptcy, then you’ll have a piece of mind that your investments will be safe.

3 Cons of a SDIRA

#1 Due diligence is a must

Remember, you must use a custodian when initially establishing a SDIRA. Their role is “passive” meaning they will NOT perform due diligence on each transaction for you.

What this means is that it’s up to YOU to perform your own due diligence before making any investment.

A good rule of thumb is, “If YOU don’t understand it,  don’t invest in it.”

#2 Some tax breaks are lost

Unfortunately depreciation can NOT be claimed on property held within a SDIRA.

Also, there may not be a way to take advantage of operating losses as well.

#3 Unrelated business income tax (UBIT)

Unrelated Business Income Tax, or UBIT, applies to the profits of an active business owned by a tax-exempt entity such as a qualified retirement plan. 

For example, if an IRA invests in an unincorporated active business (such as a gas station, grocery store, etc.), the net income (profit) generated is subject to UBIT.

 UBIT also applies to an IRA that uses debt to buy an investment, such as a loan on a real estate property. The income attributable to the debt, known as Unrelated Debt Financed Income (UDFI), is subject to UBIT.  

What Is a Self-Directed 401k?

An important thing for beginner real estate investors to understand is that you’re NOT able to invest directly in real estate via a traditional 401k through your employer.

I’ve asked several folks that have these types of plans and have yet to find one that allows participants to buy investment properties or participate in crowdfunded real estate deals.

The only possible way around this is if your employer sponsored 401k has an option of investing in a REIT fund such as the Vanguard Real Estate Index Fund.

Related article: REITs vs Syndications – Why Not To Invest In REITs

If you’re wanting to directly invest in real estate using your retirement account, then this is where the self-directed 401k plan comes in to play.

It’s also known by other names such as:

  • Solo 401k
  • Solo-k
  • eQRP
  • Uni-k
  • One-participant k
For more information, check out the following IRS website.

Checkbook Control

These plans are sometimes referred to as a:
  • checkbook IRA or
  • checkbook retirement account
It allows account owners to have direct checkbook control of their retirement accounts whether they have employees or not.
Unlike a traditional 401k plan, you’re in total control. If you want to purchase an asset, you simple write a check from your account (making sure you follow all rules and guidelines of course.)

Similar to self-directed IRAs, you’re able to invest in rental property (directly or  passively via syndications), precious metals, notes or oil and gas.

Self-Directed 401k Advantages

#1 No Unrelated Debt Financing Tax (UDFI) with Leveraged Real Estate

The self-directed 401k conforms to IRS rules and qualifies for special tax breaks.

Remember that you’ll pay UBIT if you use your IRA for real estate investing if there’s debt involved including my favorite, passive syndications.

By using a self-directed 401k, you can avoid this tax as it conforms to IRS rules under Section 401.

#2 Fewer plan restrictions

The self-directed 401k plans have fewer restrictions when compared to a regular 401k.

For example, most 401(k) plans have limits written into them. They restrict:

  • what you can do
  • what you can’t do
  • what you can invest in
  • when you can access your money

Self-directed 401k plans give you total control over what you invest in such as real estate, precious metals, etc.

#3 Consolidated account

Another advantage is the ability to consolidate all other outstanding retirement accounts like 401(k)’s and IRAs into one place and manage those funds more efficiently.

Furthermore, if you have a spouse who also is contributing to multiple retirement accounts of their own, those accounts can also be moved into the plan.

The transfer of funds are both tax-free and penalty free.

What If You Have a 401k Plan From A Previous Employer?

If you still work for an employer and have an active 401k plan, then your options for investing in real estate could possibly be limited.

But on the other hand, if you have an old 401k plan from a previous employer, your possibilities for investing in different asset classes are much better.

While you can’t invest in real estate directly through an employer-sponsored 401k, you can choose to roll a former employer’s 401k account into a SDIRA in which you can. 

 While most self-directed IRAs opened for the purpose of buying real estate are done with large rolled-over accounts, you can also open a self-directed IRA to fund on an ongoing basis.

How To Invest In Real Estate With Your 401k (other than a Self-Directed 401k)

#1. 401(k) loans

One of the ways to invest in real estate using your 401k is by taking out a loan against it.

Most plans will allow you to access funds (up to $50,000 or half your balance – whichever is less) to finance purchasing rental property.

You must repay the loan within 5 years and the interest you pay is typically 1% point above the prime lending rate.

Basically the interest payments are made back to the account, so you’re essentially just paying that interest back to yourself.

But if the loan isn’t repaid by the deadline, it’ll be treated and taxed as though it was an early distribution. If this is the case then it will result in a 10% penalty as well as income taxes owed based on your tax bracket.

#2. 401k Rollover to a Roth IRA

Another option to allow you to invest in real estate using your 401k would be by rolling over your current 401k into a Roth IRA.

This process will allow you to transfer over your investment tax-free and then use the proceeds to invest in rental properties.

One other thing to mention, when you perform a direct rollover as much as $10,000 into a Roth IRA, you can avoid the 10% early withdrawal penalty and restrictions imposed on a 401k distribution.

It should also be mentioned that you’ll be required to pay income tax on the money that’s transferred to the Roth IRA due to the fact that 401k funds are pre-tax contributions while Roth IRA contributions are post-tax.


Now that you know some of the ways to diversify your portfolio into real estate investments while using retirement funds, it’s always a good idea to involve your advisor and/or a tax advisor in the process.

Utilizing careful planning is a must to ensure you’re following all of the IRS rules.

If you want to learn more, join the Passive Investors Circle to start the process of passive income creation. 

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