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10 Crucial Tips Before Investing 401k in Real Estate

10 Crucial Tips Before Investing 401k in Real Estate

10 Crucial Tips Before Investing 401k in Real Estate

What is 401k?

According to Investopedia, a 401k is a tax-advantaged, defined-contribution retirement account offered to employees. Just like with IRAs, there are both traditional, and Roth plans. Like with IRA plans, the traditional 401(k) is tax-deferred until withdrawal. The Roth is taxed at contribution.

Withdrawals from a Roth can be tax-free.

Withdrawals without penalty cannot be made until after the age of 59 and a half.

The contribution limit for employees under 50 is $19,500. For those over 50, the limit is $26,000. If the employer matches contributions, the combined employee and employer contribution is capped at $58,000 or 100% of the employee’s compensation for the year.

For self-employed individuals, there is a Solo 401k plan. It is available only to a small business owner who has zero full-time employees. The contribution limit for the Solo 401k is $60,000. Both a husband and wife may work in the same small business. Both spouses can contribute to the total amount, making the couple’s limit $120,000.

Solo 401k plans can be either traditional or Roth. The Solo 401k offers greater investment flexibility than regular 401k plans.

Dmitriy Fomichencko
Dmitriy Fominchencko

Dmitriy Fomichencko is the leading expert on Solo 401ks. You can get to know Dmitriy by tuning into Creek Side Chats episodes 90 and 114There is no better custodian for your Solo 401k plan than Dmitriy’s company, Sense Financial

Sense Financial specializes in the Checkbook IRA. The Checkbook IRA is a component of a Solo 401k plan that gives the real estate investor complete control over their investment strategies.

With the Checkbook IRA in place, custodial fees for each real estate transaction are eliminated. The Checkbook IRA provides excellent flexibility and freedom of usage of the 401k funds.

Is it better to invest in 401k or real estate?

It depends on your investment goals and life circumstances. 401k vs. real estate is not an either-or decision.

Both 401k and real estate can be used in combination. Your best decision may be to invest in both a 401k and real estate. Your goals for attaining financial freedom can be accelerated by using a combined method.

If you have 401k accounts from former employers or you are a small business owner with a Solo 401k plan, you can use these accounts to invest in real estate.

Invest 401k in real estate to exponentially grow your retirement funds. Employing the combined strategies will lead to financial freedom sooner rather than later.

There is not a better residual stream of income than rental income. Leveraging retirement accounts to invest in real estate that produces cash-flowing rental income provides opportunities for an excellent passive stream of income.

Jarret Hills Estates

Can I Invest my 401k in Real Estate?

If your plan resides with your current employer, it is unlikely that you can invest 401k in real estate. Most employers do not offer real estate investment options in their 401k plans.

The limitation of investment options is the most significant disadvantage of a 401k plan.

For those who have 401k plans from former employers, there are more options. These plans from former employers can be rolled over into self-directed IRAs. Once the 401k is rolled over into a self-directed IRA, real estate is a viable investment option. For more information on using self-directed IRA retirement accounts to invest in real estate, see the article: Is Buying Real Estate Using Self-Directed IRA a Good Investment?

For the small business owner with an active Solo 401k, real estate is definitely an investment option that should be considered.

How do you buy real estate with your 401k?

To invest 401k in real estate, it most likely will have to be a plan from a former employer rolled over into a self-directed IRA. A small business owner can use their Solo account to invest 401k in real estate.

With either the self-directed IRA for the Solo 401k, investing in real estate offers many opportunities to develop wealth for financial independence.

10 Crucial Tips Before Investing 401k in Real Estate

Tax implications of investing 401k in real estate

As Investopedia states, 401k plans are taxed advantaged retirement accounts. Tax-advantaged refers to favorable tax status held by certain qualified investments, funds, or other financial vehicles.

A real estate investment is a tax-advantaged investment. Leveraging both the 401k and real estate offers excellent tax advantages that can accelerate the growth of financial independence. To use tax-advantaged investments to their fullest potential requires planning.

10 Things to consider before investing 401k in real estate

1. Are Taxes Deferred on 401(k) earnings?

A 401(k) real estate investment can earn income and at the same time defer taxes. When paying cash for a real estate property, there is no need to be concerned with depreciation or expenses because income in the account is not taxed.

2. Are Capital Gains Taxes Assessed on the Sale of Real Estate

On the sale of a real estate property held by a 401(k), there is no capital gains tax.

The 1031 exchange hassle is removed.

Although a 1031 exchange may be considered to avoid the unrelated business income tax (UBIT).

3. Are Solo 401(k)s subject to UBIT?

Leveraging through debt financing is one of the most incredible benefits of real estate investing.

IRA and 401(k) accounts can finance with non-recourse loans. The earnings apportioned to the leveraged amount are subject to UBIT tax for the IRA.

The Solo 401(k) is exempt.

4. What Are the Contribution Limits?

The contribution limit for an IRS account is $6,000 ($7,000 if over age 50). The Solo 401(k) contribution limit is $60,000.

5. Must the 401(k) pay ALL the expenses?

YES!  The 401k is the owner of the property.  Contributing outside capital or labor to the project is a prohibited transaction.  The 401k can borrow from 3rd party sources, not from the 401k trustee or other profited persons, and pay labor costs and other expenses.   

10 Crucial Tips Before Investing 401k in Real Estate

6. Who Holds Title to the Real Estate?

The Solo 401(k) is a separate entity from you. You are the Trustee. The Solo 401(k) is the titleholder. This is an example of how the title will be taken: Jane Doe, Trustee of Green Valley Trust.

7. Who Pays Deposits When Making Purchase Offers?

The entity making the purchase offer pays the deposits. The entity is the retirement account. The deposit fund must come from the retirement fund making the offer.

8. How Can I Purchase Real Estate With a 401(k)?

The simplest method is a direct purchase. The 401(k) pays all cash. This method avoids the possibility of UBID taxes.

9. Can I Purchase Real Estate with a Partner Using my 401(k)?

You can purchase with other people’s 401(k), IRAs, personal funds, limited partnerships, corporations, or LLCs. It is possible to partner with yourself. If you plan to partner with yourself, discuss your plans with your IRA custodian. If the self-partnership is not handled correctly, it could be a prohibited transaction.

10. Can My 401(k) Borrow to Purchase Real Estate

Yes, a 401(k) can borrow. The loan must be non-recourse. A non-recourse loan disallows the lender from seeking recourse beyond the surrender of property in the event of foreclosure.


401 K accounts were established in the 1970s. Even though there have been options for using them to invest in real estate since their establishment, many people remain unaware.

The vast majority of employers still do not offer the option of self-directing active 401k plans. The only option is to roll an inactive plan into a self-directed plan.

For the small business owner, the Solo 401k plan can be used for real estate investing. A small business does not have to be a full-time endeavor.

Fulfilled professionals who are running consulting, advisory, or coaching practices on the side can use their part-time small business to establish a Solo 401k plan.

A Checkbook IRA established with Sense Financial provides tremendous flexibility for busy professionals to invest in cash-flowing, income-producing passive real estate opportunities.


Leaping into the unknown can be overwhelmingly frightening. If you are considering real estate investing using retirement funds, schedule a FREE 30-minute call. I’m always happy to share my experiences. I am not an IRA Custodian, so I have nothing to sell. I am very familiar with SDIRAs as I’ve used mine to invest for many years. If you prefer email, send me a note with your questions and concerns at

About the Author – Dr. Allen Lomax

With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to success. Through passive10 Crucial Tips Before Investing 401k in Real Estate real estate investments, he helps engaged professionals create time freedom to live abundantly in all life’s areas.