The only way to invest in real estate using your 401k is if you have established a Solo 401k / Self-Directed 401k or a Roth Solo 401k. Self-directed 401k was created by the IRS to aid small business owners that had no other employees and self-employed individuals. This type of 401k is also useful for individuals that earn a significant portion of income by way of self-employed activities. 

These are a few tips to get started on investing in real estate using a solo 401k.

Rental Investing is Wise

IRA rules state that you shouldn’t have any business profit from investing your 401k in real estate. This makes it important that you deposit all rental checks in your 401k trust bank account if you have any properties on rent. Make sure that you don’t deposit the rental income in your business or personal account. Rental investing is allowed under IRA rules. 

You can use the funds in the account to pay for all ongoing expenses, such as property maintenance and taxes. It is important that you keep retirement and personal funds as separate as possible to avoid triggering a taxable event or a prohibited transaction. Never use the rental income from such properties for personal expenses. That may qualify as a taxable distribution. 

Many people use their self-directed 401k funds to invest in real estate for the sole purpose of flipping properties. This refers to buying a property, fixing it and then selling it for a profit. Don’t “flip” properties on a regular basis. Experts claim that 1 – 2 properties a year is alright. However, it is recommended that you receive rental income from the property for at least 9 months before reselling it. 

Opening a Self-directed 401k

You need to follow a sequential set of steps for successful real estate investing using your 401k. For starters, you will need to open a self-directed 401k account after complying with all stipulated rules and guidelines. It is imperative that you make all real estate investment payments, including the escrow deposit from the funds you have in this account. 

You can fund the solo 401k account in various ways. Many people prefer annual contributions or transfer from other qualified plans, over direct rollovers from IRAs and other traditional retirement plans. 

Determining the Best Property Purchasing Approach

The IRA allows four different methods of investing in a self-directed 401k plan in real estate. These are:

• Debt financing
• All cash purchase
• LLC
• TIC

Each of these investment methods come with their own sets of pros, cons and rules. 

Best Practices While Using 401k to Invest in Real Estate

• You or any of your immediate family cannot live on the property invested in
• Refrain from performing maintenance work (blue-collar jobs) yourself
• Get an unaffiliated third-party to carry out repairs and management
• Always deposit rent checks to your 401k trust bank account
• Self-directed 401k cannot be used to purchase properties you own personally
• You cannot sell the property to yourself or a business you own
• You cannot invest in properties by making partial payments from your personal account and 401k account