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by John Csiszar, Demand Media
A 401k plan is an employer-sponsored retirement plan designed for long-term savings and investment. Most 401k plan administrators limit the types of investments allowed in the plan to traditional offerings such as mutual funds, stocks, bonds and certificates of deposit (CDs). The primary reason for this is that investments such as real estate require additional paperwork and reporting responsibilities and must adhere to strict IRS regulations. If your plan does not allow direct real estate investment, there are alternative strategies you can employ to use your 401k funds to buy real estate.
Talk to your 401k administrator. Find out what types of investments are permitted in the plan. Regardless of IRS permission, if your 401k administrator does not allow real estate investments in the plan, you cannot buy them.
Review the complexities involved. Even if your plan allows you to buy real estate, examine whether it would be easier to buy the property outside of your 401k. The IRS imposes numerous restrictions on real estate purchases in a retirement account, and coupled with the additional paperwork required, you may find it easier to avoid using your 401k altogether.
Take out a 401k loan. Although your administrator may not allow real estate purchases, most 401k plans allow loans, which you can use for any purpose. The IRS limits 401k plan loans to the lesser of 50 percent of your account value or $50,000, so if you choose this route, your investment options may be limited.
Roll over your 401k. If you cannot buy real estate in your 401k or the $50,000 limit on a loan is too small for your purposes, you can consider rolling your 401k plan to a self-directed IRA. Done properly, this is a tax-free transfer, and you can use the full balance of your IRA to purchase real estate, assuming you find a custodian that allows you to open a self-directed IRA for real estate purposes.
Consider a real estate investment trust (REIT). A REIT is a professional real estate management company that takes investor dollars and purchases real estate on their behalf. The REIT itself is a marketable security that trades on the stock exchange like any other stock, thus there are no restrictions in terms of buying them in 401k plans. REITs generally provide a high-income stream and the potential for capital appreciation, and eliminate the need for individual investors to worry about purchase contracts, buying and selling actual real estate, and day-to-day events such as maintenance and rent collection.