If you have a retirement plan in place but want to get involved in real estate investments, will you be allowed to do so? Using 401K for investment property is allowable. However, there might be a restriction that you can only use it for rental purposes. Also, you might want to be very careful when taking large funds from your retirement account. That money probably won’t be easy to replace.
Also, experts recommend that you are under 59.5 years of age and still employed before you get involved so that you’ll have enough time to build some of the savings back up or get the property prepared for tenants to earn rent money.
When mortgage interest rates are rising, a 401k loan provides cost-effective access to the money you need. The options are to either take out a 401k loan that comes with interest and must be repaid or to withdraw the amount you need, but it might come with penalties if not correctly. Experts generally consider it safer to withdraw from a Roth IRA or some other type of IRA.
When it comes down between your options for using 401k for an investment property, many experts recommend taking out a loan, as there are no early withdrawal penalties to worry about. Also, you won’t have to pay any income tax on whatever amount you withdraw. You do, however, have to pay yourself back, so make sure you’ll be able to do so before you take out the loan in the first place.
Using 401k for Investment Property With Caution
You must also realize that the repayments do not count as contributions, so there won’t be a tax break or reduction of taxable income. Your employer won’t match those repayments, either. Depending on the plan provider, you might not even be allowed to make contributions to the 401k account at all during the repayment period.
As with the withdrawal option, it might be a better option if the cost of the investment property is going to exceed $50,000, as that is the allowable maximum for a loan. The IRS will allow you to do this if the money is urgently required, such as that you need it for the down-payment on a principal residence. Learn about the stringent rules before you withdraw any money for real estate purposes so that you can avoid a penalty.
Using 401k for investment property might be a lot easier if you have a self-directed account. You will have more flexibility and options. Learn more about how you can diversify your retirement portfolio with Rocket Dollar. They offer an extensive learning database, and assistance is available when you need it.