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How To Use 401k To Invest

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How Do I Use My 401k To Invest In Real Estate

Your 401k could be your ticket to financial freedom, well before you reach retirement. Over the years, Ive helped a lot of people like you, people exploring alternatives to or diversification from the corporate world, to make their retirement savings work for them now vs. later. About 20% of our clients use our self-directed 401k program to invest in property, as a business. The first question they always ask me: How can I use my 401k to invest in real estate?

Let me start by saying that you need to have a good grasp of the nuts and bolts of the process, including whats allowed and what is not. You can invest in real estate but not from a traditional fix and flip perspective. With a self-directed 401k, you have to think of yourself as being in business as a property management company. In this case, your self-directed 401k invests in your corporation which, in turn, makes the real estate investments. Its not you, personally, making the investments, as is often portrayed on HGTV shows.

For example, I recently spoke with a couple who is looking to relocate to another state where they want to buy a couple of 8-plex units. The girlfriend has been working for a major corporation and the division she works in was recently sold off to another company therefore, she is no longer an employee of the major corporation.

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What Is A Solo 401 & How To Invest It In Real Estate

Home » Learning » What is a Solo 401 & How To Invest It in Real Estate?

Kate Christensen

Summary: In this article, youll learn about solo 401s. Topics include what is a solo 401, the difference between traditional and Roth solo 401s, eligibility requirements, rules, contribution limits, distributions, tax advantages, and how to use a solo 401 to invest in real estate.

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What Happens To My 401 Plan Account If I Change Jobs

If you switch jobs, you may want to transfer your old 401 plan account into your new employers plan known as a rollover, or roll-in. But not all employers will allow a rollover. If you dont want to roll your account over or you cant, you may have several options:

  • Stay with your old plan

    If your account balance is above a certain level , your previous employer may give you the option to keep your investments in its plan.

  • Move your savings

    You can roll over the money into an individual retirement account . This may or may not be the right option for you, depending on several factors, including fees and how the IRAs investment options compare to your old and new employers 401 plans.

  • Cash out your savings

    If none of the above options appeals to you, you could take a distribution for the full amount of your old 401 in cash, subject to taxes and penalties.

When Do I Have To Start Making Withdrawals From My Ira

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You cant keep your funds in a retirement account indefinitely. Generally, youre required to start taking withdrawals from your traditional IRA when you reach age 70 ½ . Roth IRAs, however, dont require withdrawals until the owner of the account dies.

The amount that youre required to withdraw is called a required minimum distribution . You can withdraw more than the RMD amount, but withdrawals from a Traditional IRA are included in your taxable income. If you fail to make withdrawals that meet the RMD standards, you may be subject to a 50% excise tax. Roth IRAs do not require RMDs. Your money grows tax-free, since contributions are made from after-tax dollars, and your withdrawals in retirement aren’t taxed.

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Fully Legal And Irs Compliant

In 1974, Congress enacted the Employee Retirement Income Security Act to shift the burden of building retirement assets from the employer to the employee. ERISA, when paired with specific sections of the Internal Revenue Code, makes it legal to tap into your eligible retirement accounts without an early withdrawal fee or a tax penalty.

The Traditional Solo 401

Just like a traditional 401, an individual retirement account allows you to invest money, pre-tax. The benefit is that while youre working, it provides a nice tax break. At retirement age, you can begin withdrawing money, but it will be taxed based on your income at that time.

The biggest disadvantage to a traditional 401 is that when you reach retirement age, your income tax rate may be higher than when you first invested. Which means youd essentially be eliminating any tax advantage you may have enjoyed during previous years.

If you think you will be in a lower tax bracket when you retire compared to during your working years, then a traditional solo 401 could be a good option.

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Set Up Your Contribution

Contributing is easyjust tell your payroll department how much to withhold from each paycheck. Traditional 401 contributions are not included in your taxable income when you put the money in you will get taxed once you take that money out in retirement.

Some companies also offer a Roth 401 option, which is taxed in the opposite waycontributions are made with after-tax dollars, but plan holders dont get taxed when they withdraw funds in retirement.

How Much Should You Contribute to Your 401?

The more you save for retirement and the earlier your start saving, the better off youll likely be in retirement. If youre lucky enough to have an employer that matches your contributions, at a minimum youll probably want to take full advantage of your employer match.

Maximizing your 401 benefits you in the long run. 401 employer contributions vary, so it makes sense to find out how matching works at your company, and then contribute at least enough to get that free money.

Leave Your Retirement Savings In Your Former Qrp If The Qrp Allows

How to Use Your IRA/401K to Invest in Real Estate

While this approach requires nothing of you in the short term, managing multiple retirement accounts can be cumbersome and confusing in the long run. And, you will continue to be subject to the QRPs rules regarding investment choices, distribution options, and loan availability. If you choose to leave your savings with your former employer, remember to periodically review your investments and carefully track associated account documents and information.


  • Your former employer may not allow you to keep your assets in the plan.
  • You must maintain a relationship with your former employer, possibly for decades.
  • You generally are allowed to repay an outstanding loan within a short period of time.
  • Additional contributions are generally not allowed. In addition to ordinary income tax, distributions prior to age 59½ may be subject to a 10% additional tax.
  • RMDs, from your former employers plan, begin April 1 following the year you reach age 72 and continue annually thereafter, to avoid IRS penalties.
  • RMDs must be taken from each QRP including designated Roth accounts aggregation is not allowed.
  • Not all employer-sponsored plans have bankruptcy and creditor protection under ERISA.

If you choose this option, remember to periodically review your investments, carefully track associated paperwork and documents, and take RMDs from each of your retirement accounts.

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Using A Ira Or 401 To Invest In Cryptocurrency

You can use a self-directed IRA to invest in Bitcoin and other cryptocurrencies. However, options are limited with a 401. We discuss your options for investing in cryptocurrencies with a retirement account.

NOTE: Below Ive done my best to research IRA and 401 crypto options, I however Im not a Retirement Plan Administrator, I am a researcher. So youll want to double check with a professional before taking the final leap.

First off, what you can invest in with an IRA or 401 is defined not by what is allowed, but what is not allowed.

In general the only things not allowed are life insurance contracts and collectibles .

Meanwhile, cryptocurrency, being an investment property for tax purposes, is not expressly prohibited as an investment option, and thus can be considered an allowable investment for retirement accounts.

While the above is true, you need specific types of accounts to be able to invest due to other rules that end up prohibiting cryptocurrency .

Given the above, without going into detail, the bottomline here is that you need either a self-directed IRA or a Solo 401 to invest in cryptocurrency through a retirement account.

The self-directed IRA one is a little more straight forward, what you need to do is 1. either set up an IRA limited liability company to purchase investment property , or 2. set up a Bitcoin IRA with a custodian like .

So is it doable? YES. Is it easy? NO or simple not really .

How To Pay Off Your Heloc Faster

If you purchased a rental property with your HELOC and are wondering how to pay down that loan faster, heres what Id suggest. Consider whether or not you need the income from your rental property right now. Refer to my video on The Three Stages of Real Estate Investing and consider using your rental income to fire at the balance of your loan.

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Withdrawing When You Retire

After you reach the age of 59 1/2, you may begin taking withdrawals from your 401. If you leave your job in the calendar year when you turn 55 or later, you can also begin taking penalty-free withdrawals from the 401 you had with that current company. If you are a public safety worker, this rule takes effect at the age of 50.

Once you reach 72, you are actually obligated to begin making required minimum distributions or RMDs.

How To Build An Emergency Fund Using Your Retirement Investment Accounts

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If you are part of the majority of Americans that has a retirement account in addition to your Social Security check, then you possess all you need to build an emergency fund.

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The average 60-year-old has around $729,000 in their 401 with a 38-year contribution, according to Person Capital. The number might seem like much, but with rising inflation, higher costs of living and longer life expectancies than ever before, it can easily be whittled down.

If 2020 taught us anything, it was the importance of an emergency fund. Retirees have likely paid off or come close to paying off their primary residence and are ready to spend their golden years enjoying their hard-earned savings.

Its important to reassess what it means to have a nest egg, though. The typical rule of thumb used to be 6 months of living expenses, but the pandemic has upended that recommendation. A pragmatic goal now is to have at least 9-12 months of living expenses put to the side. What do we actually mean when we say this?

Lets say that you do not have the roughly $50,000-75,000 in an emergency fund that you might need to stay afloat for a year. Heres how to leverage your retirement investment accounts to get there.

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Leave Your Assets Where They Are

If the plan allows, you can leave the assets in your former employers 401 plan, where they can continue to benefit from any tax-advantaged growth. Find out if you must maintain a minimum balance, and understand the plans fees, investment options, and other provisions, especially if you may need to access these funds at a later time.

Rules You Need To Know

If you want to become a real estate investor through your IRA, there are a few rules you’ll need to follow. Recall in the previous section that I mentioned that you and your IRA are considered to be two separate entities. As a result, the following rules apply:

  • Any real estate you buy with a self-directed IRA needs to be purely for investment purposes. There are some definitions of the term “investment property” that allow for a small amount of personal use, but this is not the case with the property you own through an IRA.
  • Property expenses must be paid by the IRA, not by you directly. For example, if the property needs a new roof, the check needs to come from the IRA. For this reason, it’s very important to leave some funds available in the IRA to cover any unforeseen expenses.
  • You can’t use any personal possessions in the property.
  • Any rental income needs to be paid to the IRA, not to you.
  • You can’t buy a property that is currently owned by you or a relative in a self-directed IRA.

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Forming A C Corporation

Owners of C-corps are taxed separately from the corporation itself, which limits the liability of individuals. The corporations debt is not passed to its principals and cannot become personal debt obligations. Because a C-corp is the only business entity that can legally sell shares to a retirement account, its the only business setup thats compatible with the ROBS plan. You cannot pair a sole proprietorship, limited liability company or S corporation with a ROBS plan.

Because of the importance of dotting all your i’s and crossing all your t’s with a ROBS plan structure, you may want to work with a business attorney to set up your C-corp.

Diversify Your 401 Portfolio


Your portfolio is the collection of assets you have. You have nine investments in your portfolio if you have three mutual funds, three stocks, and three bonds. This mix is also diversified. It’s made up of different assets. This reduces the risk.

You have many options for planning your diversification. One is the “100 minus age” rule. The percentage of stocks in your portfolio should be the number you arrive at when you subtract your age from 100. The rest should be made up of mutual funds, bonds, or other investments. Your portfolio should be 60% stocks, with the remaining 40% in mutual funds and bonds, if you’re 40 years old and setting up your 401.

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If You Have An Old 401k Here’s What You Can Do

So, your options for investing in real estate are rather limited if you have an active 401k, meaning that you still work for the sponsoring employer.

On the other hand, if you have an old 401k, the possibilities are much greater.

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 an individual retirement account, or IRA. And while many IRA custodians don’t offer the ability to buy real estate, some offer an account type known as a self-directed IRA.

As the name implies, a self-directed IRA allows you to direct how your funds are invested, within the law. To be sure, there are some things you can’t invest in. For example, the law prohibits you from investing in collectibles with IRA funds. However, there’s nothing that specifically prohibits you from using a self-directed IRA to buy real estate.

  • Things youcan buy with a self-directed IRA: Real estate, crowdfunded real estate investments, tax lien certificates, precious metals, cryptocurrencies, private equity investments.
  • Things youcan’t buy with a self-directed IRA: Collectibles, such as coins, artwork, and antiques.

Ways Around The Limitations

One way to use your 401 to purchase private stocks is to take out a 401 loan. Not all plans have provisions for retirement loans, so once again, you will need to check with your plan administrator for more information. The IRS also has its own set of rules that govern retirement plan loans. Visit the agencys website for more retirement plan topics covered in depth.

Converting or rolling your 401 into an individual retirement account, or IRA, is another way for you to purchase private stocks using your 401. Before trying to access the funds in your 401, be certain you are familiar with how your plan is structured as well as any IRS consequences you could face.



  • Research the funds in your 401 to determine what companies and industries it includes. If you don’t want to take the risk of borrowing or withdrawing from your 401 to purchase privately-held stocks, you can adjust your 401 to invest in funds that target the specific companies or industries in which you have interest.


  • Contributions to 401s enjoy preferential tax treatment. Carefully research how changes to your account would affect your taxes and balance those considerations with the risks associated with privately-held stock purchases.

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