If an individual is looking for long-term opportunities, they can consider a 401k real estate investment. Real estate is a long-term, profitable investment and often ideal for retirement portfolios. However, there are many limitations that make investing in real estate in a 401k less attractive than mutual funds or stocks.
Investing in real estate requires a lot of capital. Buying even one property is often prohibitive for most investors without outside financing. It is possible to withdraw funds from a 401k, but there is a standard withdrawal limit of $50,000 less, based on the total value of the individual’s account. Negotiations with the seller can sometimes be possible because if they are promised cash for their property, they may be willing to lower the price to avoid a lengthy financing process. Even with this in mind, a property priced this low may not provide the necessary returns to outweigh the upfront costs.
It’s possible to withdraw a small amount from the 401k to use as collateral for a larger loan, funds that can be repaid with a profit on the transaction later. Withdrawals, unless for certain reasons, do not incur a penalty, but this should be considered when considering this route. In addition, since the purpose of the account is to save for retirement, this choice must be used wisely and the investor must be sure of the rate of return.
Another alternative to investing in real estate in the amount of 401k is to send a portion of the funds to a real estate IRA. This will provide more flexibility and, if it’s a Roth IRA, incur fewer tax penalties than traditional real estate investing.
Investing in real estate in a 401k is limited compared to other types of investment transactions. While possible, it may not be viable and your ultimate retirement goals should be considered along with the pros and cons of this type of real estate investment. Consult an investment professional, such as a financial planner, to help you make the best decision for all your retirement plans and needs.