As we all know, retirement savings accounts like 401(k) come with built-in investment options. Mostly, options like stocks, mutual funds, etc., are used by the account holder, but there is one more high-potential investment option available that can enhance your overall retirement savings significantly. With this, if you are wondering how to invest 401(k) in real estate, then you are not alone. Even many employees have the same issue because they also want to explore this investment option. So, let’s discuss about it.
Can You Invest 401(k) In Real Estate?
Yes, it is possible to invest the 401(k) retirement savings account’s funds in real estate. However, this cannot be done directly through an employer-sponsored plan. If we talk about the traditional 401(k) plan, then this is restricted to investment options to stocks, bonds, and mutual funds. However, if you want to invest in real estate through your 401(k) money, you need to roll over the account’s funds into a Self-Directed 401(k) or a Self-Directed IRA (SDIRA).
Basically, these accounts are specially designed to invest in residential or commercial properties, raw land, real estate investment trusts (REITs), and more. With this specialization, these accounts are an ideal choice for individuals who want to invest their retirement savings into properties and real estate to grow them till retirement age. Also, using a 401(k) account to invest in the estate can help in getting diversification, the potential for higher returns, and tax-deferred (or even tax-free) growth.
How To Invest 401(k) In Real Estate?
As mentioned, a 401(k) account can be used for investment in real estate. But this cannot be possible with a traditional account. Also, most people ask, Can I invest my 401(k) in real estate without paying taxes. For this, you need to have a Self-Directed 401(k) or a Self-Directed IRA (SDIRA). So, let’s understand these accounts.
Self-Directed 401(k) & Self-Directed IRA (SDIRA)
A self-directed 401(k) is a retirement savings account that is made for the use of individuals who are self-employed or do not have a fixed source of income. This account is often called a solo 401(k) due to its particular nature. It is the best-fit saving option that can be used for the investment in alternative assets, including real estate, private equity, precious metals, and more, unlike traditional 401(k) plans, limited to stocks and mutual funds.
However, if we talk about a Self-Directed IRA (SDIRA), then it is similar to the solo 401(k) account. It is also a retirement savings account that allows the account holder to invest in even a wider range of investment options, like real estate, private companies, cryptocurrencies, and precious metals. This account is administered by a separate custodian who has all the records of investments and returns.
Types of Real Estate You Can Invest In With 401(k)
If your 401(k) account allows you to invest in real estate, then there are various types of real estate investment options available :-
| Type | Description |
| Rental Properties | Residential homes or apartments that generate rental income. |
| Commercial Real Estate | Office buildings, warehouses, and retail stores. |
| Raw Land | Undeveloped land that could appreciate. |
| REITs | A more liquid and diversified option. These are SEC-registered companies that own or finance income-generating real estate. |
| Real Estate Crowdfunding | Pool money with other investors to buy large properties via platforms like Fundrise or RealtyMogul. |
How To Use My 401(k) To Invest In Real Estate?
It is not very difficult to use the 401(k) account for investment in real estate. But still, many ask, how to invest 401(k) in real estate in 2025.
There are some steps that you need to follow to do the estate investment :-
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Check Eligibility
As mentioned, it is required that your plan administrator allows you to do this type of investment. If your current plan does not allow you to invest in real estate, then you need to roll over the funds into a solo 401(k) account.
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Set Up A Self-Directed 401(k)
You need a self-directed 401(k) account. This will give more flexibility over investment options with a wide range of areas like real estate.
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Rollover Your Traditional 401(k)
When you decide to roll over the funds from the traditional 401(k) to the new self-directed 401(k) account, the investment options are going to get wider. This move is tax-free and avoids early withdrawal penalties if done properly.
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Get A Custodian
It is suggested to get a highly qualified custodian who can manage all your accounts and ensure that the transactions are up to the IRS norms. You can choose an expert in real estate investments.
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Choose Your Real Estate Investment
Options include :-
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- Residential rental properties
- Commercial buildings
- Raw land
- REITs (Real Estate Investment Trusts)
- Real estate syndications
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Purchase
Now initiate and complete the purchasing process. You will be selecting a real estate investment option based on the price of the investment. When the price of the asset increases, you will get profits from the investment.
Tax Implications of Using 401(k) For Real Estate
When investing your 401(k) in real estate through a self-directed account, it becomes essential to understand the tax implications. Although income and gains within the retirement account grow tax-deferred (Traditional 401(k)) or tax-free (Roth 401(k)), some situations can lead to serious tax implications:
- UBTI (Unrelated Business Taxable Income) may apply if your property generates active business income.
- UDFI (Unrelated Debt-Financed Income) applies if you use a mortgage or leverage within the account.
- Early withdrawals made before age 59½ are typically subject to income tax and a 10% penalty.
It is advised to consult with a tax advisor who is experienced in self-directed retirement accounts and can help you minimize risk and maximize tax benefits.
Should I Invest My 401(k) In Real Estate?
In the question, of how to invest 401(k) in real estate it is important to understand that retirement accounts like 401(k) are meant to provide a growing advantage to the account holder. In this, real estate is a rising and high potential option for those who have long-term saving goals.
Many reasons convince us to invest in real estate, including :-
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Portfolio Diversification
With an option like real estate investment, you can prevent your savings from being affected by the volatility of market funds like stocks, mutual funds, bonds, etc.
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Consistent Income Strategy
If you choose to invest in rental properties then you can have a steady stream of income monthly. This earned rent or cash will again get reinvested in your 401(k).
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Growing Potential
As we all know, how the valuation of property assets rises with time. If you invest in real estate options, then the chances of getting higher returns and savings become potentially elevated.
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Inflation Protection
The market contains uptrends and downtrends, and sometimes the valuation falls so low. History is the witness, property costs always become higher than before, whether rented or owned.
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Controlled Choice
Unlike mutual funds and bonds, real estate investment comes with more control for the account holder over their assets.
Final Thoughts
Investing the funds of a 401(k) account needs focus and knowledge of all types of investment options. If you are asking how to invest 401(k) in real estate or how to use 401(k) to buy property, the answer is the same. Building solid retirement savings will not only become a source of income, but it can be a legacy that you pass to your generations. You need to use a self-directed 401(k) to invest in real estate properties. However, this route requires due diligence, compliance with IRS rules, and a clear understanding of your investment goals.
Frequently Asked Questions
How to convert your 401k into real estate without penalty?
Mostly, the traditional 401(k) account does not facilitate investment into real estate assets. So, you need to roll over the account’s funds into a self-directed 401(k) or self-directed IRA, to make the investment area wider than before. With this, you can easily invest the 401(k) funds into real estate without any penalty.
Can a solo 401k invest in real estate?
Yes, a solo 401(k) account can easily be used to invest in real estate without facing any taxation and penalties. This is an ideal option that provides a return on investment with the help of rising property costs.
Can I withdraw from my 401k for an investment property?
Any withdrawal done before the age of 59½ years needs to result in a 10% early withdrawal penalty with the current tax bracket. It is not advised to take a hardship or direct withdrawal. Instead, roll over the funds into a self-directed 401(k) account, which facilitates broader investment options.
