A 401k is a plan that allows employees to defer income earned pre-tax to be held and invested, sometimes with a match contribution by an employer. The employee is allowed to contribute up to 20% of their annual income with a maximum of $18,500 to a 401k with a potential employer match of up to 8% of the income. These funds can be used strictly for investing or could be used as a part of a profit sharing plan where the employee shares in the profit of their company.
A 401k plan is self-directed putting the employee in the driver’s seat when it comes to how the funds are invested. There are some rules to what you can and cannot invest in when you are using 401k funds for purchases of assets. You can use the 401k funds to purchase real estate for income purposes and mortgages (notes). You will find that these investments are also not typically subject to business income taxes as they are investments. The other rule for purchasing property or mortgages is that it must be done at arm’s length.
When you find an investment property that you are interested in you will need to work with the administrator of the 401k in order to have them request that the trustee purchase the property or mortgage on your behalf but be careful to avoid some pretty common mistakes. The investment will be set up such that the income and expenses run through the 401k and never go through your personal accounts. This can be done as often as you are able with the funds available to you. The key is to make sure that your 401k plan is self-directed. This is a question that will need to be asked of the administrator of the plan.
There are individuals that use their 401k plan to invest in distressed buildings or homes and then sell them for a profit. Others purchase notes and either collect on them or sell them for profit. This is an excellent way to build up an investment portfolio but does come with some risk especially related to early withdrawal issues. If you do not invest well you could lose your 401k plan entirely so you want to be careful how you invest and make sure that you understand what kind of control you have with the plan itself. You want a self-directed plan that you can make decisions on without a great deal of approval from the administrator or trustee.
Combining 401k and real estate investing is an excellent way to take money that you have already set aside for your future and grow it significantly. We all know that real estate investing is still one the most stable methods of building generational wealth and as such learning how to build a real estate empire using your 401k is a smart strategy. See also this post about the difference between a traditional and a rollover IRA.
Investing in real estate using this method means you have access to money you need to improve on the real estate assets that you have under the plan and also gives you the ability to change your investing strategy based on the current and future real estate climate in your area and beyond. You can make investment decisions based on the way that the real estate market and economy are changing as you plan for your retirement. This gives you more likelihood of success and the ability to change your real estate investing strategy at will. Anyway, you should at all times protect your 401k in case you should die before you can enjoy your retirement years.