Types of Real Estate You Can Purchase with a Solo 401(k)
A Solo 401(k) can be used to purchase a myriad of real estate-related investments. This can include certain types of foreign and domestic real estate.
Rolling over your 401(k) funds into an SDIRA lets you convert a 401(k) to real estate without penalty. Once your money is in your SDIRA, it's strongly encouraged that you acquaint yourself with prohibited transactions and IRS regulations.
Most 401(k) plans invest in mutual funds, stocks, bonds, and other financial instruments, but you can also use these funds to invest in real estate. Real estate investing can diversify your retirement savings and potentially boost returns.
The short answer is yes because it's your money. There are no restrictions against using the funds in your account for anything you like but withdrawing funds from a 401(k) before age 59½ will incur a 10% early withdrawal penalty as well as taxes.
If there is no designated beneficiary for a 401k, the account typically becomes part of the deceased's estate. It then goes through the probate process, where a court supervises the distribution of assets according to the will or state law if there is no will.
Notably, the contribution limits for self-directed 401(k) are the same as the contribution limits for traditional 401(k) plans. For 2025, that limit is $23,500 (up from $23,000 in 2024).
With a self-directed IRA you can use retirement funds to invest in real estate in a tax-advantaged manner. This is also known as a "Real Estate IRA". Self-directed IRA real estate investing can be carried out through direct purchases, partnered funds, an LLC, or with a non-recourse loan.
Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $23,000 in 2024 ($22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus.
If you're under the age of 59.5, you'll face an extra 10% penalty for withdrawing from your 401(k) early. That's a huge blow that makes paying down your mortgage not worth it. That means if you take out $50,000 to pay down the mortgage, you'll automatically be penalized $5,000.
Traditional solo 401(k)s are funded with pre-tax contributions and have taxable withdrawals. Roth solo 401(k) contributions are made with after-tax dollars. Qualified withdrawals are tax-free. Solo 401(k) participants could invest up to 100% of their self-employed income until they reach the contribution limit.
Independence: Real estate agents working solo can choose their clients and marketing strategies based on their own business model. Sense of ownership: Working as a real estate agent appeals to those with an entrepreneurial spirit. Your wins are your own, which can be highly satisfying.
No, you cannot directly use a 401k to buy an investment property. However, there are a couple of indirect ways you can use your 401k to invest in real estate. We'll talk more about that later. But first, let's discuss what a 401k is.
You cannot hold real estate in your 401(k). If your goal is to invest in real estate, the best option is to roll over your 401(k) funds to an SDIRA. Doing so allows you to hold the real estate in your retirement account without penalty or taxes.
Did you know you can flip homes with your self-directed IRA funds? In fact, since the creation of the IRA (Individual Retirement Account) back in the early 1970s, the IRS has permitted IRA holders to use IRA funds to buy a house, hold it, or flip real estate.
However, the solo 401k still allows you to continue to do the backdoor Roth without worrying about the pro rata rule. One potential downside of the solo 401k is that after you reach a specific threshold of your balance in the account (currently $250,000 in 2024), you will have to file an annual form 5500 with the IRS.
Direct prohibited transactions: defined as any transaction that would result in a loss of your tax-deferred status. These transactions generally fall into the categories of: 4975(c)(1)(A): sale or exchange, or leasing, of any property between a plan and a disqualified person.
If you are self-employed and don't have any full-time employees, a Solo 401(k) can give you many of the same benefits of a Self-directed IRA but with higher contribution limits, increased investment freedom, and flexibility when it comes to funding access and tax benefits.
5-year rule: If a beneficiary is subject to the 5-year rule, They must empty account by the end of the 5th year following the year of the account holders' death.
Methods of 401(k) Withdrawal for Real Estate Investment. One way to use your 401k for real estate investment is by taking a loan from your 401k. The IRS allows you to borrow up to 50% of your vested account balance or $50,000, whichever is less.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.