How You Can Use Your 401(k) to Invest in Real Estate

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A 401(k) is a great way to save for retirement, and you have a few options when it comes to investing. In general, employer-sponsored 401(k) accounts invest in mutual funds and exchange-traded funds. They usually can’t be used to invest in real estate directly and instead are typically limited to investing in a real estate fund, if that’s offered as one of the options, like the Vanguard Real Estate Index Fund.

However, you can roll a 401(k) with a former employer into an individual retirement account or IRA, which you can then use to passively invest in real estate in certain situations. You can only roll over a 401(k) that you had with a former employer; you can’t roll over the one you have with your current employer.

Rolling over your old 401(k)

Most IRA custodians don’t allow investors to buy real estate using their IRAs, so to invest in real estate using your IRA, you will need a self-directed IRA. With a traditional IRA, all contributions are made with pre-tax dollars, while with a Roth IRA, they are made with post-tax dollars.

A self-directed IRA allows you to decide how to invest your money, with some restrictions. For example, you won’t be able to invest in collectibles using IRA funds. However, real estate is a potential investment with a self-directed IRA.

A self-directed IRA allows you to gain exposure to real estate and make crowdfunded real estate investments through fintech companies like Yieldstreet. Other than investing in REITs, crowdfunding is often the easiest way to invest in real estate through a self-directed IRA. Investing in real estate in a self-directed IRA can help avoid having to pay taxes in multiple states, unlike crowdfunding investments outside an IRA.

Tax Benefits of investing in real estate with an IRA

The tax advantages of investing in a self-directed IRA are similar to those of non-self directed traditional or Roth IRAs. However, when you use a self-directed IRA, there are other benefits. For example, you may get to keep more of your property’s rental income if you buy it through your self-directed IRA. IRAs also can provide protection from capital gains taxes if you sell a property you own, although you may have to pay income taxes on the gain.

Let’s say you buy a property through a self-directed IRA and then rent it out, earning $1,200 in rental income every month after expenses. The rental income would accrue inside the IRA tax-free. If you sell the property for more than what you paid for, you wouldn’t have to pay capital gains taxes on it. If your self-directed IRA is set up as a traditional IRA, you won’t pay any taxes until you withdraw the money in retirement, when you pay income tax based on whatever your tax bracket is.

An old, employer-sponsored 401(k) may be a great place to start if you want to start investing in real estate. . Learn more about how you can take retirement planning to the next level with a Yieldstreet IRA. Contact us at [email protected] with any questions.

Please note that Yieldstreet cannot provide tax advice, so please consult a tax professional for advice specific to your situation.

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