401k Real Estate Investing Tips

A lot of people don't know that they can actually use their retirement money savings as an investment and there are in fact different methods to engage in 401K real estate investing.

So before we go any further, let me tell you that we are going to discuss the basic things you need to know about this type of investment, and if you need a detailed information, you may have to consult with an accountant before you execute any methods on IRA or 401K real estate investing.

One of the benefits when you go for this typeof investment is having a non-cash source for your capital and also if done right. When your account receives a monthly rental income from the purchased property, you can avoid income tax with that. And when you sell for a profit you can avoid the capital gains tax. And this will give you savings of up to twenty five percent.

One more method you can do to help lessen your acquisition cost is if you utilize your 401K as a fund for your down payment your down payment]. This is much better than merely making a withdrawal which will trigger a ten percent penalty including the amount added on the withdrawal.

You will have to pay back the interest on the loan for five to ten years in one to two percent above the prime rate. This will be taken out of your income in equal installments when you start repaying it.

But this is favorable if you're considering fixer upper since you can refinance to quickly pay back your loan after the rehab. But there are some drawbacks in this sort of set up just like in case you will change employer or lose job, the plans may need you to pay your 401k loans within sixty days. Otherwise, youll default and pay the taxes with the added ten percent penalty for early withdrawal in case you will not be able to pay the full balance. The other thing is that the max cap loan is only $50k. There is also a possibility that you will not earn money from what you take out and you will also have to pay for the penalties for the late payments.

Another alternative is to covert to an IRA and outright purchase a property. You can overturn your 401K to a Roth IRA or a self-directed IRA. This will not only expand your investment alternatives but you are not limited to a $50K cap that normally goes with a 401K real estate investing loan.

There is also one other option where you can finance the down payment by using your IRA balance. Then to complete the deal, you can have your IRA assume the rest of the purchase price in the form of a mortgage. This one is quite tricky, because you will need a non-recourse loan in order for the property to be security interest but not the IRA itself. And it might be difficult to get a lender willing to do this. And you may be surprised when some unrelated income tax that will show and this can run as high as thirty five percent on the income from the financed part of the property.

These are some of what you can profit from 401K real estate investing and you can get some tax benefits with your IRA if done appropriately. So if you are thinking of doing this and may want a more detailed info on the pitfalls of this sort of investment, you may have to consult with your accountant.