Real Estate Investing Education Center

Investing in Real Estate with Your 401K or IRA

By Michelle Clardie on 12/01/2021
As the premier real estate syndicate in California, we at Gatsby Investment get many questions from investors about investing in real estate with retirement funds. Common property-related retirement investment questions include:

  • Is it possible to use retirement funds to invest in real estate?

  • If so, what are the benefits of using a retirement account to invest in real estate?

  • And how can I start investing in real estate with my retirement funds?

We’re happy to answer all your questions about using retirement funds to invest in real estate. And, while this can be a confusing topic, this article will provide some much-needed clarity so you can decide if real estate investing is a good option for your retirement strategy.




Can You Invest in Real Estate with Retirement Funds?


Not only is investing in real estate with retirement funds possible, but it’s also a smart way to diversify your investment portfolio and reduce your tax burden. 

Traditional retirement investing focuses on trading stocks and bonds on the securities market. While this classic investing method is an important way to establish your retirement portfolio, it leaves you open to the volatility of the market. When the stock market dips, your entire nest egg could be negatively affected. But with the comparative historical stability of the real estate market, you can gain some protection against stock market volatility by investing a portion of your retirement funds in real estate. 

Even better, real estate held in a retirement account is eligible for income tax benefits. When you invest in real estate with tax-deferred retirement accounts (like a traditional IRA), you use pre-tax dollars to fund the account, and only pay income taxes when you withdraw funds in retirement. Alternatively, you can choose a “tax-free” account type (like a Roth IRA), which allows you to use after-tax dollars to invest in properties today and pay nothing in taxes on the gains from your retirement investments. Whether you choose to use tax-deferred accounts or tax-free accounts, you’re in control of reducing the tax burden when you invest in real estate with retirement accounts.

Why You Should Invest in Retirement Accounts


Before we discuss the specifics of how to invest in real estate with retirement funds, we want to quickly cover the importance of investing in retirement accounts.

Retirement accounts allow you to invest some of your income during your working years, which you can then withdraw during retirement to cover your living expenses for a comfortable lifestyle through your golden years. The American government wants citizens to create their own retirement accounts to minimize the burden on the social security system, so the government offers tax benefits to incentivize the public to invest in retirement plans. 

Investors of all ages can take advantage of the tax benefits of retirement planning. But younger investors have an additional reason to invest for retirement: compound interest. Since compound interest causes investment income to grow exponentially over time, younger investors have the opportunity to create an impressive nest egg with comparatively small upfront investments.  

With this in mind, let’s look at the logistics of investing in real estate with your retirement funds. 



How to Invest in Real Estate with Retirement Funds


Investing in real estate with retirement funds requires using specific types of retirement accounts. Common retirement plans like employer-sponsored 401(k)s allow you to invest in stocks and bonds, but not in alternative investment types like real estate. 

Options for retirement plans that can invest in real estate include:

  • Solo 401k real estate investing 

  • Traditional IRA

  • Roth IRA

  • SEP IRA

Whichever account type you choose, there are a few basic rules that apply to investing in real estate with retirement funds:

  1. The property will be owned by your retirement account entity (like a trust or LLC), as opposed to being owned by you personally.

  2. The investor cannot personally use the property.

  3. The investor’s “disqualified persons” (family members) cannot use the property.

  4. Investment property funds must remain separate from personal funds. This means all property-related expenses must be paid by the retirement account funds, not private funds.

  5. The retirement account must be managed by a financial professional.

Pros and Cons of Investing in Real Estate with Retirement Accounts


Using your retirement funds to invest in real estate comes with several advantages and a few potential downsides. 

Pros

  • Real estate markets often move counter to securities markets, so when your stock portfolio is down, your real estate holdings may be up. 

  • You’ll enjoy tax breaks through either tax-deferred or tax-free retirement plans.

  • Rental properties can provide steady cash flows. 

  • Since retirement investing is a long-term financial plan, real estate’s history of long-term appreciation is a good fit for retirement funds.  

  • You have the freedom to buy and sell individual properties or to invest in real estate crowdfunding projects. Crowdfunded projects give you access to larger real estate deals than you could typically afford to invest in as an individual.

Cons

  • Using your retirement accounts to invest in real estate requires hiring a professional to manage the account.

  • You won’t be able to claim deductions for expenses like mortgage interest, property taxes, or depreciation on your personal income tax returns.

  • All property expenses must be paid directly from your retirement account; you cannot pay expenses from personal funds.

  • Real estate purchased with retirement funds cannot be used for personal use. This means that you (and your family) are unable to stay in the property or run a business out of the property.
Each unique retirement plan type also comes with its own unique advantages and disadvantages. Let’s look at your options for retirement accounts that allow real estate holdings to see which option is the best fit for you and how to go about using each account type to invest in real estate. 


Solo 401(k) Real Estate Investing / Self-employed 401(k) Real Estate Investing


Solo 401(k)s, which are also commonly referred to as self-employed 401(k)s, are specifically designed for business owners with no employees. 

You just need an employer ID number to open a solo 401(k) account, and you can choose your tax benefit method. If you choose a traditional self-employed 401(k), you’ll use pre-tax dollars to fund your retirement account, which reduces your tax burden for the current tax year. Then you’ll pay taxes on your withdrawals during retirement. Alternatively, you can use a Roth version of the self-employed 401(k), which means you’ll use after-tax dollars to fund the account, but then your withdrawals during retirement can be taken tax-free. 

One major benefit of investing in real estate with a self-employed 401(k) is the high contribution limit. The IRS allows investors to contribute up to $58,000, plus a $6,500 catch-up contribution for investors aged 50 or older (as of 2021). This higher limit is ideal for funding real estate projects with large upfront cash requirements. 

Investing in Real Estate with a Traditional IRA


Investing in real estate with IRA funds requires creating an IRA LLC with an IRA custodian. The custodian is the financial professional who will manage your IRA, making sure your investments remain IRS-compliant. 

Compared to a solo 401(k), IRA contributions limits are low. For 2021, the IRS allows you to contribute just $6,000 per year, plus a $1,000 catch-up for investors 50 and older. So investing in real estate with IRA funds can be difficult if you can’t contribute enough to cover the purchase of the property plus property expenses. IRA LLC real estate investing might be a better fit for real estate syndication projects, which require low upfront investments and no ongoing property maintenance expense. 

Traditional IRA contributions are made pre-tax, so your contributions will lower your taxable income for the current tax year. Your investments will grow tax-free, and you’ll only pay income taxes as you pull funds from the account to cover your living expenses in retirement. 

Now that you know how to invest in real estate with an IRA, we can look at the details of investing in real estate with specific IRA account types like a Roth IRA and a SEP IRA. 

Investing in Real Estate with a Roth IRA


As with a traditional IRA, investing in real estate with a Roth IRA requires creating an IRA LLC with a custodian. Roth IRAs also have the same contribution limits as traditional IRAs, making them a good candidate for real estate syndication projects with lower upfront investment amounts. 

The big difference between the traditional IRA and the Roth IRA is the way you receive your tax benefits. While traditional IRAs use pre-tax dollars, Roth IRAs are funded with after-tax dollars, which means you don’t receive a tax break for the tax year in which you make your retirement contributions, but your investments grow tax-free, and you don’t owe any income taxes when you withdraw your funds to cover living expenses during retirement. 

Investing in Real Estate with SEP IRA


SEP IRAs are specifically for business owners with few employees (typically under 10 employees, including yourself as the business owner). Unlike the individual retirement plans discussed so far, SEP IRAs can cover multiple employees. There are high contribution limits of $58,000 (or 25% of compensation, whichever is less) in 2021, but employers must be aware that contribution percentages must apply to all employees. This means that if the business owner contributes 10% of his or her income, 10% is the contribution amount for all employees. 

The process for investing in real estate with a SEP IRA is the same as with a traditional IRA. You will form an IRA LLC with an IRA custodian, who will then invest in the property on behalf of the retirement account entity. SEP IRAs use pre-tax dollars, so your tax benefit will be realized during the year in which you make your retirement contributions. 

Investing in Real Estate with Retirement Funds with Gatsby Investment


Gatsby Investment makes it easy to invest in real estate with retirement funds. Any accredited investor using an IRA LLC or Solo 401k/self-employed 401k can invest in real estate projects. Gatsby Investment offer a wide range of investment opportunities from low-cost single-family flips to multi-family developments as well as long term rental projects. 

When you’re ready to use your retirement funds to invest in real estate, Gatsby is here to make the process as smooth and enjoyable as possible. Start investing today with our simple investment process.

The Bottom Line


Investing in real estate with retirement funds is an advanced investment technique, but investors who take the time to understand the process reap the benefits of long-term real estate appreciation, a diverse retirement portfolio, and tax benefits. 

Gatsby’s investment model is well-suited to investing in real estate through retirement funds because it uses a syndicate sponsor to manage all property operations on the investors’ behalf. Your retirement account trust or LLC simply invests with us at Gatsby, and we take care of the rest! Plus, with our easy-to-use online platform, you’ll be able to monitor your investment every step of the way. 

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