Transferring Your 401k To Real Estate: Everything You Need To Know

January 1, 2023

When you think about investing in real estate, the first thing that likely comes to mind is a home or other residential property. While these are great investments, there's another way to get involved in real estate that's often overlooked: your 401k.

Not only does this allow you to diversify your portfolio and potentially save on taxes, but it also provides access to some tax advantages that aren't available with traditional IRA accounts.

In this guide we'll cover everything you need to know about transferring your 401k to real estate investments through an SDIRA (Self-Directed IRA) so you can reap all the benefits of this unique strategy.

Find an SDIRA Provider to Help with Your 401k Rollover

Now that you're ready to move your 401k into an SDIRA, it's time to find an IRA provider who can help you make the transfer.

There are three key players in this process:

The IRA provider (or custodian) will manage the funds in your account and may also provide investment advice. You'll be able to choose between a number of different providers, so shop around for one that suits your needs best.

The IRA trustee will hold onto your money until you're ready to use it toward buying a property or using other investments like stocks or bonds. This person should also be able to answer any questions about how best to invest your funds for maximum returns on real estate purchases down the road.

Note that your IRA trustee should be licensed by FINRA (Financial Industry Regulatory Authority), which ensures their commitment both legally and ethically when handling client assets.

Open a Self-Directed IRA (SDIRA)

An SDIRA, or self-directed individual retirement account, is a type of IRA that allows you to hold investments that are not typically allowed by traditional IRAs. These include:

  • Real estate
  • Private businesses
  • Tax liens and other debt instruments

Transfer 401k Funds to IRA

If you have a 401(k) plan through your current employer, you can transfer the funds in that account directly to an Individual Retirement Account (IRA) at any time. This is known as a direct rollover or trustee-to-trustee transfer and it's the most common way people move their 401(k) funds out of their current employer's hands and into an IRA.

However, if you want to keep the money in some type of retirement plan but don't want it going through your employer anymore, one option is to take what's called an indirect rollover—essentially transferring the funds from one account with one custodian over to another account with another custodian.

Invest the IRA Funds in Real Estate

You can invest in real estate through an IRA by purchasing a house or apartment building. The benefit of this is that it will be a passive investment, meaning you won't have to be hands-on with the property and can watch as it generates income from rent payments from tenants.

The Bottom Line

If you’re thinking about using your 401k to invest in real estate, it can be a great way to diversify your portfolio and build wealth. It’s important to understand the rules that govern this process, so that you don’t accidentally run afoul of them and end up paying penalties or taxes on money that you didn’t mean to withdraw.



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