But can you use your 401(k) to invest in real estate?
The answer is yes—with the right setup and a firm understanding of the rules. This guide breaks down how it works, who can do it, and how to get started safely and effectively.
Why Investors Are Turning to Real Estate
Real estate has long been considered a solid hedge against inflation. It offers the promise of steady rental income, long-term appreciation, and portfolio diversification. For retirement savers tired of seeing their 401(k) balances swing with every market hiccup, the idea of owning tangible property—rather than abstract paper assets—can be especially appealing.
But if you have a standard employer-sponsored 401(k), your investment options are likely limited to mutual funds or target-date funds. So how can you access real estate through your retirement funds?
The Key Is a Self-Directed Account
To invest in real estate with retirement money, you’ll first need to roll over your 401(k) into a Self-Directed IRA (SDIRA) or a Solo 401(k) plan. These accounts give you full control over where your money goes—including into physical real estate, land, tax liens, and even real estate syndications.
A self-directed IRA works much like a regular IRA but with a much wider array of allowed assets. The catch? You can’t touch the property personally. That means no living in it, renting it to family members, or fixing it up yourself. All expenses and income must flow through the IRA. Breaking these rules can lead to penalties and disqualification of the account’s tax-advantaged status IRS.
If you're self-employed or run a small business, a Solo 401(k) may be a better option. It offers similar flexibility to a SDIRA but comes with higher contribution limits, the ability to borrow money using non-recourse loans, and fewer custodian constraints. It's one of the most powerful tools for real estate investors planning their retirement IRS.
What Kind of Real Estate Can You Invest In?
Once your funds are in a self-directed account, your options open up significantly. You can invest in:
- Single-family rentals
- Multifamily units
- Commercial buildings
- Raw land
- Real estate investment trusts (REITs) not traded on public exchanges
- Real estate syndications (pooled investments with multiple investors)
However, direct involvement is strictly limited. For example, if your IRA owns a rental property, you can’t manage it personally or use your own money for repairs. All management must be handled through a third party, and all income or expenses must be routed through the account.
Pros and Cons of Real Estate with a 401(k)
Advantages
One of the biggest advantages of using retirement money to buy property is tax deferral (or in some cases, tax-free growth with a Roth version). Rental income and capital gains accumulate within the account without immediate tax consequences. This can significantly boost returns over time.
You also benefit from portfolio diversification. Real estate doesn’t move in sync with stock markets, and in turbulent economic periods, it can offer more stability.
Challenges
On the flip side, there are significant complexities. Real estate is an illiquid asset, and accessing cash from your account—especially in retirement—can be tricky if it's all tied up in property.
There’s also the risk of prohibited transactions, which can trigger penalties. And let’s not forget the administrative burden: property taxes, upkeep, insurance—all of it must be paid through your account. You’ll need meticulous records and a competent custodian or administrator to stay compliant.
Best Practices Before You Jump In
If you’re serious about using your 401(k) funds for real estate, it’s crucial to do your homework—and build a team.
Start by working with a reputable custodian or administrator that specializes in self-directed retirement accounts. Companies like Equity Trust, The Entrust Group, and Advanta IRA have years of experience helping investors navigate the regulatory requirements.
If you're self-employed and considering a Solo 401(k), providers like Rocket Dollar or MySolo401k.net offer setups specifically tailored for real estate investing.
It’s also wise to consult a fee-only financial advisor or tax specialist with experience in alternative investments. Advisors listed through NAPFA or the XY Planning Network are usually fiduciaries—meaning they’re legally obligated to act in your best interest.
Is It Right for You?
Investing your 401(k) money in real estate isn’t for everyone. It requires a strong understanding of the rules, a willingness to work with professionals, and a long-term outlook. But for the right investor—especially one with a sizable retirement balance, a passion for real estate, and a tolerance for complexity—it can be a powerful way to build wealth outside the stock market.
Just make sure you follow the rules, partner with the right experts, and treat your retirement account like the business it is. Real estate can be an excellent addition to your retirement strategy—but only if you do it the right way.
References & Resources
- IRS – Prohibited Transactions
- IRS – Solo 401(k) Plans
- NAPFA – Find an Advisor
Full Bio
