Real Estate Investing with a Solo 401(k)

A common misconception by many people is that it is not allowed to use 401(k) investment in real estate or rental properties. So, self-employed individuals evaluate the benefits of 401(k) vs. real estate investing frequently.

Traditional 401(k)s offered by employers cannot be used to invest in real estate. However, you can invest in real estate with a self-directed individual retirement account or self-directed IRA (SDIRA), such as a solo 401(k) or Roth Solo 401(k).

It is not possible to invest directly in real estate with your 401(k). Depending on the circumstances, you may be able to invest in real estate using your solo 401(k). Before investing in real estate with your solo 401(k), you have to check to make sure your plan allows you to do so. 

How to Know if You Are Eligible for Solo 401(k)

You can participate in a solo 401(k) if you are among the following:

  • Self-employed individuals.
  • Individuals who earn part of their income through self-employment businesses.
  • Owners of small businesses without employees, except for themselves or their spouses.

For individuals who are not self-employed or who do not qualify for a solo 401(k), investing with IRA for real estate may be the more appropriate route for you.

Guidelines for 401(k) Investment in Real Estate

Self-directed 401(k)s follow the same rules as traditional 401(k)s. You can set up a solo 401(k), which allows you to manage the checkbook of the property without the involvement of a third-party custodian.

All fees, costs and income must be paid out of the solo 401(k), and cannot be commingled with other funds. Don't put your name on an offer when trying to buy an investment property. Instead, put the name of your 401(k), or IRA. An assignment of a contract initially written in the name of another buyer is prohibited by the solo 401(k) rules.

In the case where you do not have enough assets in your 401(k) to buy the property solely on your own, you can partner with others, and in this case, the 401(k) will own a proportionate share of the underlying property.

Another thing to keep in mind is that you cannot invest in a property that already belongs to a family member like a disqualified person, but you can invest in a property purchased from an unrelated third party with a family member or friend.

Convert 401(k) to Real Estate Investment

Real estate investments require a solo 401(k) plan if you wish to use your 401(k) account for that purpose. Owners of solo 401(k)s must contribute pre-tax dollars to their accounts. Until you withdraw them for retirement, these contributions can grow tax-free within the account.

It is important to remember that you can only contribute a certain amount to a solo 401(k) plan in a single year. A maximum of $57,000 is set as of 2020. On top of this, you can add $6,500 if you are currently older than 50 but have not yet retired.

As mentioned earlier, you must be self-employed and not have any employees that require W2 forms to qualify for this type of plan. However, your spouse is allowed to work with you. With a solo 401(k), your investment options will be significantly expanded since this type of account allows investments in any asset that's not prohibited by IRS regulations.

The 401(k) plans offer investors a variety of asset options, including:

  • Deeds
  • Private loans
  • Private businesses
  • Limited liability companies

Investment Flexibility

In contrast to other 401(k) accounts, this gives you greater investment flexibility. As you build up your retirement savings, you might want to consider investing in something that has high returns and relatively predictable cash flow, like real estate.

When you consider these when investing for retirement, you can increase the amount of money you have once you do retire. Real estate investments can be made in the following ways:

  • Developed land
  • Residential property
  • Foreclosures
  • Commercial property

As long as you make smart investments, you can earn stable returns from these real estate investment opportunities. The benefits of investing in real estate are numerous. When you invest in commercial real estate properties, these benefits are compounded.

Property values usually appreciate over time, so you are guaranteed to make money from your investment. Real estate properties also increase in value as inflation rises, making them an excellent investment. From 1968 to the present, appreciation has averaged around 6% per year.

On the other hand, investing in an apartment building will allow you to collect rent from tenants, which you can use to pay the mortgage. As an alternative, you can make a debt investment in these properties, in which case you can collect monthly payments from the interest on the loan that you’ve provided.

Why You Should Invest in Real Estate?

Alternative investments such as real estate are the most popular among retirement account holders. As long as it is not prohibited or involves a disqualified person, solo 401(k) participants have always been permitted by IRS to invest in virtually any type of real estate.

No matter what your investment style is, real estate investing accommodates both safe and risky investments. Through debt reduction, real estate provides a predictable cash flow and allows you to grow your equity. In addition, real estate serves as a hedge against inflation, since inflation tends to increase the value of properties.

You can reduce your tax bill if you invest in the equity of a property and take care of upkeep for the property that you own by deducting any maintenance, improvements, and property maintenance expenses you incur.

Work with Trusted Investment and Financial Experts

It should be noted, however, that investing in rental property via your IRA or 401k can have some disadvantages, and these should be considered before making the decision. Anyone taking this path must adhere to all IRS regulations.

It is always best to navigate this process with the help of a financial advisor or expert. Our team of dedicated financial professionals can help you determine if investing in a solo 401(k) is right for you.
To learn more, fill out our online form or contact us at 949-881-7128 at Saint Investment Group today!

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* Information in this message, including information regarding targeted returns and investment performance, is provided by the sponsor of the investment opportunity and is subject to change. Forward-looking statements, hypothetical information or calculations, financial estimates and targeted returns are inherently uncertain. Such information should not be used as a primary basis for an investor’s decision to invest. Investment opportunities on the Saint Platform are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Please see additional disclosures here.
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