By: Dana Udumulla

Key Points 

• As 401(k)s do not permit the direct purchase of real estate, opting to rollover your 401(k) to a Self-Directed IRA (SDIRA) renders a potentially top-notch resolution.
• Rolling over your 401(k) funds into an SDIRA lets you convert a 401(k) to real estate without penalty.
• Once your money is in your SDIRA, it’s strongly encouraged that you acquaint yourself with prohibited transactions and IRS regulations.

As the standard for employee-sponsored retirement plans, those wishing to purchase an investment property may pursue how to convert a 401(k) to real estate. These retirement accounts impede direct acquisition of any type of property, as well as typically prevent any sort of alternative investing. Luckily, there’s a different route to take: the act of moving funds from a 401(k) to a Self-Directed IRA (SDIRA).

Smooth Sailing with Rollovers: Converting a 401(k) to Real Estate

Prospective realty investors with funds secured in a 401(k) may be concerned about accruing tax implications or penalties. This would likely occur in the event of a general 401(k) withdrawal. Through the art of the rollover, your retirement savings can migrate from your 401(k) to a Self-Directed IRA and if done correctly, avoid any fiscal consequences. 

What’s the Appeal of Turning a 401(k) to a Self-Directed IRA?

If you’d like to convert a 401(k) to real estate, it’s feasible with the assistance of an SDIRA. Self-Directed IRAs are individual retirement accounts that grant investors conditions for investing in alternative assets. Commodities such as real estate, precious metals, private businesses, startups, and various creative endeavors are all possible through this pioneering retirement savings vehicle.  Furthermore, these asset classes are generally uncorrelated with Wall Street products, which can potentially result in a reduction of risk while synchronously diversifying your retirement portfolio.  

Since many investors are ardent for self-autonomy, being able to self-direct your retirement savings into investments that align with an interest or belief holds great allure. Additionally, Self-Directed IRAs are tax-advantaged entities. These retirement savings havens let your gains grow tax-deferred or tax-free, according to your decision to create a Self-Directed Traditional IRA or Self-Directed Roth IRA. When choosing to convert a 401(k) to real estate, SDIRAs can lead to possible property prosperity. 

How Do I Perform a Rollover to Convert a 401(k) to Real Estate?

Rollovers are fairly straightforward processes. Prior to embarking on the rollover portion of this process, it’s best to start at square one by checking with your current plan administrator to see if you’re able to rollover funds from your 401(k). From there, you can establish your SDIRA. Madison Trust has developed a simple, three-step guideline for your reference. 

• Open - Open a Self-Directed IRA with Madison Trust by completing our easy online application.  

• Fund – Fund your SDIRA by transferring or rolling over all – or a portion – of your funds from an existing retirement account, such as an IRA or 401(k), or by making an initial contribution.  

• Invest – Instruct Madison Trust to send your IRA funds directly to your investment.  

As stated, the “fund” portion is where the act of rolling over will come into play. You can elect to perform a direct rollover, which implies your current 401(k) institution will merely send your 401(k) funds directly over to your newfound Self-Directed IRA custodian. You will be required to fill out paperwork in accordance with your current plan administrator. 

Your other option is to perform an indirect rollover, which is referred to by some as the 60-day rollover. This process entails the funds of your 401(k) being released directly to you. The ball is now in your court – you have 60 days to place these funds into your Self-Directed IRA to fund your account. Missing the allotted time frame by any smidge will lead to penalty, so it’s considered best practice to mark your calendar on the date of your 401(k) removal. 

Considerations When it Comes Time to Convert a 401(k) to Real Estate

An imperative key to ensuring Self-Directed Real Estate IRA success is the familiarization of prohibited transactions. There are certain ventures that could lead to you compromising the integrity of your account. For example, the property purchased under your SDIRA should not be for personal use, or intended for the use of someone you know. Investment properties are the only ones sanctioned for this account type.   

This falls in line with self-dealing and per se prohibited transactions. Any activity or transaction you perform that can justify the IRS’s belief that you’re currently benefiting from your SDIRA will likely end with penalties. The purpose of your Self-Directed IRA is to cultivate an enriching retirement – not to lavish in your gains in the present day.

Same goes for any dealings between your account and a disqualified person. A disqualified person typically pertains to your spouse, lineal descendants, and closely held entities (where either you or a disqualified person owns 50% or more). This also indicates that all sweat equity must be performed by individuals aside from yourself and disqualified persons. 

Exploring Prohibited Transactions Further

Once your Self-Directed IRA is situated, you may realize that your goal to convert your 401(k) to real estate wasn’t entirely attainable. Budgeting mistakes happen, and you can discover that the remaining funds you have are not sufficient for the buying of your dream property. The good news is you can apply for a loan under your SDIRA. What you must take note of is the type of loan you proceed with. 

Extension of credit prohibited transactions involves taking out credit for an investment that will be purchased within your SDIRA, but then personally guaranteeing the loan. This is a faux pas as it could appear to the IRS that you are purposely arranging things, so your Self-Directed IRA benefits.

Acquiring a non-recourse loan is the best angle to approach this matter as these loans are designated for IRAs. In the event of default, the investment property would stand as collateral, and your personal belongings - including other investments - would not be up for the taking. 

The Pinnacle of Retirement Properties

If you hope to convert a 401(k) to real estate, it’s highly achievable and generally easily workable through a Self-Directed IRA. Madison Trust is readily available to streamline this process and make your realty investing ambitions materialize. Regardless of your property’s class (residential, commercial, raw land, or REIT) our Self-Directed IRA Specialists can assist. Begin your self-directed voyage and convert a 401(k) to real estate today!