Using a 401(k) to Invest in Real Estate

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What is a Solo 401(k)?

A Solo 401(k) operates in a similar manner to that of an employer-sponsored 401(k), except a Solo 401(k) holder would be the sole employee of his or her own business. In this regard, the account holder would simultaneously act as employee and employer when managing his or her Solo 401(k).

As with their self-directed IRA counterparts, Solo 401(k)s can hold alternative investment options like real estate.

Large Contribution Limits

A Solo 401(k) allows investors to defer substantially more income than a Traditional or Roth IRA. In 2019, the contribution limit for a Traditional or Roth IRA is $6,000 for those under the age of 50 (account holders age 50 or above may contribute up to $7,000). By comparison, Solo 401(k) holders may contribute up to $56,000 (employee and employer combined) in 2019 if they're under the age of 50 (account holders age 50 or above my contribute a combined $62,000).

Higher annual contribution limits can afford a greater deal of flexibility when pursuing real estate investments. You could make larger down payments, pay off debt more quickly, or build your real estate portfolio with new assets by contributing larger sums of money every year.

Tax-Deferred or Tax-Free Growth

Investing in real estate with a self-directed retirement plan will not compromise the tax advantages of said plan. A 401(k) can yield earnings and defer annual tax obligations, which remains true whether the account holds mutual funds or multi-million-dollar investment properties. When paying the full purchase price for real estate using 401(k) cash, investors don’t have to worry about depreciation or investment expenses because there are no taxes on growth.

Furthermore, if/when the plan sells an investment property, Solo 401(k) holders needn't concern themselves about capital gains or the need for a 1031 exchange (although IRA holders may consider a 1031 exchange as a measure of avoiding unrelated business income tax (UBIT)). The tax advantages enjoyed by 401(k) owners can create a dramatic snowball effect of growth over time.

Special Tax Treatment on UDFI (Unrelated Debt Financed Income)

All retirement plans can utilize non-recourse financing to increase their purchasing power. Lenders will usually look for down payments between 30-40%. With an IRA, profits generated from debt-leveraged property are subject to (UBIT). This special tax is the IRS’s way of leveling the playing field when accounts use the money of others to make tax-advantaged money for themselves. However, UBIT associated with UDFI does not apply to Solo 401(k)s. As such, self-employed real estate investors can harness the power of debt leverage without having to worry about an extra tax bill.

It’s important to note that the 401(k) structure is not exempt from UBIT when it comes to unrelated business taxable income (UBTI), which is derived from an operating business. A continuous fix-and-flip operation within your 401(k) may constitute an operating business and may garner UBIT accordingly. Keep this in mind when thinking about your prospective real estate strategy (fix-and-flip, rental properties, raw land, etc.).

Fewer Investment Restrictions

Many brokerage firms offer Solo 401(k) plans for little or no cost, but holders may be restricted to stocks, mutual funds, and other publicly traded securities per the brokerage-controlled plan documents. If you lease a Solo 401(k) plan document from New Direction Trust Company, you'll have the flexibility to invest in real estate and other alternative assets.

To invest in real estate with your Solo 401(k), choose an experienced IRA custodian with a long track record of successful on-time closings. If you already have a Solo 401(k), check with your provider to learn about any investment limitations. You can always perform a restatement of plan documents, meaning you can replace your existing Solo 401(k) plan documents with new documents that allow you to invest in anything allowable by law.

Using a 401(k) to invest in real estate offers account holders many unique benefits. Feel free to give us a call at 877-742-1270 or send us an e-mail at to learn more about investing for retirement with tax-advantaged savings.