Use a 401k Loan to Purchase Real Estate
401k loans are allowed by most plans and allow you to take out a loan against the balance. The maximum loan amount for a 401k type loan is $50,000 or 50% of your balance, whichever is the lesser amount. Typically the interest rates are reasonable and fixed through the life of the loan. Rates in the past 20 years have been between 5%-8%, which is much lower than you might get for a personal (unsecured) loan. The term of a 401k loan is usually 5 years but if you use it to borrow for the purchase of your primary residence, you can get a 10 year term. I don’t know if there is a limit to the number of times you can get the 10 year term but I have done it 3 times now. The main caveat to using your 401k is that if you lose your job, you are required to repay it in full. If you don’t have the money, the loan is considered a withdrawal and you must pay income taxes plus a 10% tax penalty on the balance owed. So, if your job is not secure, don’t try to use this type of financing.
Borrowing against your 401k is a subject that stirs lots of emotion, but does it make sense in certain situations?
- don’t even think about using it for a vacation!
- Using a 401k loan to consolidate is not a good idea.
- Don’t use it to buy a new car– buy a used car instead and pay cash
Can I use my 401k to buy a house?
I think that the best use of a 401k type loan is towards the down payment of your primary residence. And if you use the “Bootstrap method” of investing in rental properties, you probably can do this multiple times. A secondary use might be to go towards the purchase of a rental property, but you will probably need to use the 5 year term option. There are some things you should be aware of when using your 401k for a loan. The interest is not tax deductible if you are borrowing it to purchase your house. It may be tax deductible if it is used for business purposes. You pay taxes twice on the interest. (This is not as bad as it sounds. Even if you are in the highest tax bracket when you retire it means an incremental increase of 2%.) If you default, you will have to pay a 10% tax penalty plus income taxes on the balance. Article from http://www.investing-in-rental-property.com/401k-loan.html
Investing in Real Estate with an Individual Retirement Account – “IRA”
Types of Property Your Individual Retirement Account Can Own
- Single family and multi-unit homes, Apartment buildings, Co-ops, Condominiums, Commercial property and Improved or unimproved land (leveraged or unleveraged)
If your self-directed real estate IRA doesn’t have enough money to pay for the entire purchase, you can finance or leverage any income-producing property. The property is used as the collateral for the loan. Because the property belongs to your IRA, the debt must be repaid from assets within your IRA, whether it’s income from the property, permissible contributions, or other assets in the IRA. All real property is either purchased or sold for your benefit using your Qualified Plan and/or IRA funds. Additional Requirements
When purchased, these properties become assets of your retirement plan or account. In addition:
- You may not personally own property that you intend to purchase with plan funds and you must ensure that your intended purchase is not a prohibited transaction.
- Neither you, your spouse, nor your family members (other than siblings) may have owned the property prior to its purchase by your plan.
- Neither you nor your family members (other than siblings) may live in or lease the property while it’s in your plan.
- Your business may not lease or be located in or on any part of the property while it’s in your plan.
- You may receive any property as a distribution from your plan as a retirement benefit.