Investing Your 401(k) In Real Estate

After college, I worked in nine different jobs over a ten-year period, trying to find my ideal career. Many of these jobs offered a retirement plan as a benefit, which resulted in multiple 401(k) accounts that I neglected to manage.

However, I eventually learned about the option to roll over idle 401(k) money into a self-directed IRA account, which allowed me to choose how and where to invest my retirement funds.

By investing in real estate syndications, I could earn cash flow distributions that went back into my self-directed account, and I could watch my retirement savings grow over time.

Most people are not aware that they can invest their retirement accounts in assets beyond the stock market, but with some research and action, anyone can use their 401(k) to invest in real estate and build a stronger financial future.

Investing in real estate, especially in growth markets, can provide higher returns than traditional stock market investments, and with careful planning, one can even achieve financial independence and retire early.

This article provides information on what a 401(k) is, how to invest in real estate through syndications, important considerations before doing so, and other tips for taking your retirement funds to the next level.

What Is A 401(k)?

A 401(k) is a retirement savings program offered by employers that allows individuals to save and invest for their own retirement while benefiting from special tax advantages.

Investment Options

Typically, employers offer traditional 401(k) retirement plans that have a limited selection of investment options, such as stocks, bonds, mutual funds, and index funds. It is rare for employers to provide self-directed retirement plans that permit alternative investments like real estate.

As a result, most people are unaware of the option to transfer their 401(k) funds to self-directed retirement accounts, which offers greater flexibility and control over their retirement investments.

If you possess an old 401(k) from a prior employer, transferring it to a self-directed account is a straightforward process, granting you more autonomy in choosing how to invest your funds.

Income Tax Considerations

401(k) plans offer significant tax benefits, as they allow you to delay paying income tax until you reach retirement age.

You have the option to structure your 401(k) contributions in two ways. Firstly, by using them to decrease your adjusted gross income and thereby delay paying income tax. Alternatively, you can opt for a Roth 401(k), where you pay income tax upfront and reap the benefits of tax-free growth in the future.

Although a Roth 401(k) does not provide an immediate tax deduction, it permits you to accumulate tax-free growth and avoid paying taxes on withdrawals later on.

Annual Contributions

It’s essential to bear in mind that 401(k) plans have an annual contribution limit that frequently changes each year. This limit is determined by your age and whether you’re a W-2 employee or a business owner. If you’re over 50 years old, you may be eligible for a higher contribution limit.

Furthermore, some employers provide matching contributions to their employees’ 401(k) plans, which can significantly enhance their retirement savings. For instance, an employer may match an employee’s contribution up to a specific amount. If your employer provides this benefit, it’s worth exploring to maximize your savings potential.

401(k) Considerations

It’s important to keep in mind that a 401(k) is intended to be a long-term retirement savings account and should not be used as a short-term savings option. The money in a 401(k) can only be accessed penalty-free once you reach retirement age, at which point it can be used to cover living expenses, healthcare costs, and other expenses.

However, this does not mean that you cannot choose how to invest and grow your 401(k) funds. As long as you adhere to the guidelines and avoid using the funds for personal use before retirement age, you have the freedom to invest as you see fit.

While many people opt to invest their 401(k) funds in the stock market, this may not always align with your investment objectives, particularly when taking age into consideration.

Alternative Investments Via Self-Directed Retirement Accounts

A self-directed 401(k) or IRA allows you to diversify your investment options and explore alternative asset classes such as real estate, precious metals, foreign currency, promissory notes, and even cryptocurrency. The money invested in these accounts cannot be accessed until retirement age, so it may be a lower-risk way to explore different types of investing.

A self-directed retirement account can provide greater flexibility and control over your investment portfolio. For instance, you could use your self-directed account to invest in a real estate syndication to test the waters and determine if it aligns with your investment goals before committing additional funds. This approach may help you hedge against inflation and ensure that your retirement savings are growing in a way that aligns with your financial objectives.

How To Invest Your 401(k) In Real Estate

Investing in real estate can be a viable option to maximize the growth of your 401(k) over time. However, it’s important to have a self-directed retirement account to invest in real estate since traditional 401(k) accounts offer limited investment options. A self-directed 401(k) enables you to invest in various real estate options, such as rental properties and real estate syndications.

Investing In Real Estate Syndications

Investing in real estate syndications through your 401(k) can be an excellent passive investment strategy that requires little active participation in property management. Real estate syndications typically have a long-term investment timeline of five years or more, which makes them an ideal investment for retirement accounts, as they are typically not funds that require immediate access.

Find A Self-Directed Custodian

In order to invest your 401(k) in real estate, the first step is to transfer your funds to a self-directed IRA or 401(k). A quick online search will reveal several self-directed custodians, but you should consider factors such as fees (both upfront and annual), investment options, and the investment process when choosing one.

For instance, you should be aware of your custodian’s signing process when dealing with property purchase documents or a PPM (private placement memorandum) in the case of a real estate syndication.

If you need recommendations for self-directed retirement account custodians, you can contact us for assistance.

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

It’s important to keep in mind that the rollover process can take a bit of time, ranging from around 10 days to several weeks. As such, if you’re interested in investing in an opportunity that’s closing soon, you’ll need to plan ahead accordingly.

However, once you’ve successfully completed the rollover process, you’ll be able to invest your retirement savings as you see fit, including in real estate investments. Your self-directed 401(k) account will provide you with a world of possibilities to grow your retirement funds.

Finding Investments For Your 401(k)

A self-directed 401(k) allows you to break away from the traditional mutual funds and invest in a variety of assets like real estate, stocks, bonds, and even crypto, and create a customized portfolio that meets your retirement goals. This freedom and control of diversification enables you to maximize growth and reach your retirement goals.

Investing in real estate syndications, especially those with a value-add component, through your 401(k) funds can provide an independent real estate investment opportunity, which may offer downside protection. However, you must be an accredited investor to invest in certain syndications, and any returns (cash flow or sale proceeds) need to be directed back to the retirement account, not to you or any other entities. Most custodians have a specific process to ensure that distribution checks are made out to the retirement account.

The Benefits Of Diversifying Your Retirement Funds Through Real Estate Investments

Investing for retirement can be a complex decision, with many options to consider. Real estate investments have become a popular choice for many people, offering a range of benefits for long-term wealth building. Below are some of the main advantages of investing your retirement funds in real estate.

1. Real estate investments are tangible assets that you can see and touch

Real estate is a more tangible investment compared to stocks or mutual funds, which can be more complex to comprehend and provide less autonomy.

2. Real estate investments tend to be much more stable than the stock market.

Real estate investments have a track record of being resilient even during economic downturns. The value of real estate is usually stable or may even slightly increase, especially in areas with robust job growth and population expansion. This characteristic can provide you with a cushion against any market volatility and still enable you to achieve long-term gains.

3. When you purchase real estate with your 401(k), you have the potential to earn income from rental income. 

Making improvements and renovations to a property can also increase your equity in the investment, which can be a valuable source of income that is not tied to broader economic conditions.

4. Real estate investments offer

It’s important to consult with a CPA to determine the best way to utilize these tax benefits based on your individual 401(k) structure.

Real estate investments could be a viable option to help you achieve your retirement goals and customize your retirement investing, thereby potentially reaching your retirement goals faster. If you are looking for a reliable investment for your 401(k) funds, then considering real estate investments could be a good option.

Things To Keep In Mind When Considering Real Estate Investments For Your 401(k)

To ensure that you achieve your overall investing goals and maximize growth, there are a few things to keep in mind before adding a real estate investment to your self-directed IRA or 401(k).

Risk Tolerance

To begin with, it is important to assess your risk tolerance before adding a real estate investment to your self-directed IRA or 401(k). Despite being less volatile than the stock market, real estate investments are still investments, and there is always a risk of losing money.

Moreover, it is worth noting that real estate investments that offer higher returns, such as development deals or fix-and-flips, usually involve higher risks as well.

Time Horizon

The second factor to consider is your time horizon. If you have several decades before retirement, you may be willing to take on more risk with your 401(k) investments. On the other hand, if you plan to use those funds in the near future, you may want to choose more conservative real estate investments.

Due Diligence

The third factor to consider before investing in real estate with your 401(k) is to conduct thorough research. You need to explore the real estate market, talk to other investors, and seek guidance from our team to assess whether investing in real estate, or specific types of real estate investments, aligns with your financial goals. Proper planning and research can help you make an informed decision about investing in real estate with your 401(k) and pave the way to achieving your financial objectives.

Tips For Success When Investing In Real Estate With Your 401(k)

Investing in real estate doesn’t have to be limited to the wealthy, as anyone can get started with some research and planning. A great place to start is with your 401(k). Here are a few tips to help you begin:

1. Possible rephrased heading: “Choosing the Type of Real Estate Investments for Your 401(k)

Which types of real estate investments are you considering, such as single-family homes, multifamily homes, or commercial properties?

2. Decide how involved you want to be with your investments.

Would you prefer to actively participate in the investment, potentially yielding higher returns, or would you rather take a passive approach and have someone else handle the work?

3. Evaluate your risk tolerance. 

What is your risk tolerance when it comes to investing in real estate? Would you prefer a higher risk investment with the potential for higher rewards, or a more conservative approach?

4. Research the market.

Have you researched the current property values and trends in the area where you plan to invest?

5. Build your team. 

Having a strong support system is crucial to the success of your real estate investments. Make sure to have a reliable CPA, a network of peers, and even consider seeking the guidance of a financial advisor or coach who can help you reach your investing goals.

By following these suggestions, you can begin investing in real estate with your self-directed 401(k) on the right track. With proper planning and preparation, achieving your financial objectives can be within reach.

FAQs About Investing Your Self-Directed 401(k) In Real Estate

If you’re considering investing your self-directed 401(k) in real estate but don’t know how to begin, the following frequently asked questions may be helpful:

What are the benefits of investing in real estate with a 401(k)?

Real estate investments offer numerous benefits, such as the potential for long-term capital growth, income from rental properties, and the opportunity to build equity. One of the advantages of investing in real estate with a 401(k) is that you can tap into both cash flow and appreciation. By doing so, you can invest funds that might otherwise remain idle for decades or earn a nominal return through the stock market.

In addition, investing in real estate with your 401(k) allows you to diversify your retirement funds, providing you with more control over your investments. You can learn about various types of real estate investments while using capital that you do not need immediate access to. Through this approach, you can potentially build wealth and achieve financial independence over time.

Furthermore, investing in real estate with a 401(k) can be a learning experience. You can explore different real estate investment opportunities and learn about the industry while investing with funds that are not needed for immediate use. By diversifying your retirement funds with real estate holdings, you can create a well-rounded investment portfolio that can help you achieve your financial goals.

What types of real estate can I invest in with my 401(k)?

In most cases, it’s possible to use your 401(k) to invest in various types of real estate properties, such as residential or commercial properties and land. However, you should be aware that specific restrictions may apply to your plan, and the tax implications may vary depending on whether there is a loan on the property.

To determine what types of investments are permitted, it’s crucial to consult your plan administrator. Additionally, you should seek the advice of a certified public accountant to gain a better understanding of your tax situation and how real estate investments could affect it.

How do I know if investing in real estate is right for me?

Just like any investment, the suitability of real estate investing varies from person to person. It is crucial to consult with a financial advisor and/or tax professional who can assist you in evaluating your individual circumstances and objectives.

It is also important to conduct your own research and due diligence before making any investment decisions.

Next Steps

Diversifying your retirement portfolio by investing in real estate can lead to future wealth building and growth. Despite the potential risks, the benefits are significant.

At Goodegg Investments, our mission is to assist you in developing enduring and substantial wealth, enabling you to create a secure financial future for yourself while also making a positive impact on the world.

Invest Now

If you’re prepared to invest at the moment, whether using personal funds, an entity, or a self-directed 401(k) or IRA, we encourage you to explore our open deals page for details on our existing or upcoming opportunities.

Furthermore, if you qualify as an accredited investor, we encourage you to become a member of the Onbridge Capital, allowing you to invest with us in real estate syndications (group investments).

Learn More

In case you’re interested in real estate investing but not ready to take the plunge yet, we have some resources to help you get started. Our free 7-day email course, Passive Real Estate Investing 101, is a great way to dip your toe in the water and learn more about the basics of real estate investing. Additionally, you can get a free hardcover copy of our book, Investing For Good, which provides a comprehensive guide to sustainable and impactful real estate investing.