When a person is looking for long-term opportunities, they may consider 401k real estate investing. Real estate is a long-term investment that generates income and is often ideal for retirement portfolios. However, there are many restrictions that make 401k real estate investing less attractive than mutual funds or stocks.
Real estate investing requires a lot of capital. Purchasing even one property is often prohibitively expensive for most investors without external financing. It is possible to withdraw funds from a 401k; however, there is a standard withdrawal limit of $50,000, less depending on the total value of the individual’s account. Sometimes it may be possible to negotiate with a seller, because if you are promised cash up front for his property, he may be willing to reduce the price to avoid the lengthy financing process. Even with that in mind, a property priced so low may not provide the return needed to offset the initial costs.
It is possible to withdraw a small amount from a 401k to use as collateral for a larger loan, funds that can be paid back with the proceeds of the transaction later. Withdraw funds unless for specific reasons you incur a penalty, although this should be taken into account when contemplating this route. Also, since the purpose of the account is to save for retirement, this option must be used prudently and the investor must be certain of the rate of return.
Another 401k real estate investment alternative is to transfer a portion of the funds to a real estate IRA account. This will provide more flexibility and, if it’s a Roth IRA, it incurs fewer tax penalties than traditional real estate investing.
401K real estate investing is limited compared to other types of investment transactions. While possible, it may not be feasible and your ultimate retirement goals should be considered along with the pros and cons of this type of real estate investment. Consult an investment specialist, such as a financial planner, to help you make the best decision for all your retirement plans and needs.