Dear Claire: Can I Use My 401K to Purchase Real Estate?
Using Your 401K for Real Estate: Guiding You Through Intricacies, Tax Considerations, and Potential Investment Prospects
Can I buy a house or an investment property with the money that I have in my 401k? A lot of this is going to get super complicated and you should know that if you have a 401k there are rules that are overlaid by your employer. Whatever those rules are is going to change whether you can access the money. There are some general rules that I can tell you about to answer this question.
First, can I buy property using my 401k? The answer is yes. The bigger question for you is are there tax implications if you do? Some 401ks will allow you to pull money out of the investment fund as a “loan” and then that loan you’re actually using it to pay yourself. Say I take $30, out of my 401k, I have to set up a loan for that, and I can decide what interest rate I want to pay myself. So say I only want to pay myself 4%, then that 4% and the payment on the principal is pulled out of my paycheck every month. So in that way it’s easy to automated and I don’t have to worry about that. Additionally, it’s me paying myself on my money. It’s better than paying someone else that money. It is my understanding that depending on the 401k sometimes so that loan peace is the way you avoid any tax repercussions, as you all know a 401k is pre-tax dollars. So it’s coming out of your paycheck before the IRS even knows about it and so that’s why it’s kind of magic. So in both of those instances, you’re avoiding taxes for paying yourself interest and then you’re making money on the on the property that’s invested in the market as well. So you’re almost getting two fold on that money.
You don’t really want to pull it out of your 401k if you can have tax repercussions on it unless you’re over a certain age. So obviously if you’re over a certain age and that’s another matter, but for people that are like me in their 20s, 30s, 40s, if you pull that money out of that 401k (not do it as a loan) then you’ve got fines, you got taxes, you got all kinds of crazy stuff on it that you don’t really want to do.
Another thing that you should know is that sometimes some programs allow you to pull money out to buy a principal residence, or if you’re in hardship, like if you can’t make your payments because you lost your job. But again, you’re going to want to double-check your rules on your 401k to find out what specifically your rules allow.
There are always more questions every time I do this, so, please reach out to me at [email protected]
I’m happy to engage you in a conversation that’s specific to you and will help you a lot with figuring out whether your 401k can do this.
I hope you have a wonderful day and I look forward to seeing you guys next week. Take care.
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