Here’s How To Leverage Your Retirement To Invest In Real Estate

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Jan. 4 2023, Published 8:05 a.m. ET

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Many aspiring real estate investors want to break into the business but aren’t sure where to start. Commercial real estate has traditionally had significant entrance hurdles.

Many people find it impossible to purchase a property entirely due to the high upfront cash costs. Additionally, investors will discover that real estate investments are illiquid. Real estate cannot be bought and sold as readily as stocks, bonds, and other financial instruments.

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As a result, even cash-on-hand investors frequently hesitate to invest in commercial real estate purely out of concern that they won’t be able to utilize those funds for other needs if necessary. Smart goals for these people using their retirement funds to invest in real estate would be a fantastic alternative.

Most individuals aren’t even aware that this is a choice. However, there are several advantages to investing through a retirement account. For instance, more retirement accounts prohibit withdrawals made before the age of retirement. This indicates that these finances are already scarce. Even though the money might not be “available” for private usage, many other asset types can be purchased using them as investments.

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1. 401(K) Plan

An employer-sponsored retirement account is a 401(k). It enables workers to set aside a portion of their pre-tax income for retirement. A 401(k) plan can be assured by the whole year’s paystubs. Individual contributions are limited by the IRS (Internal revenue service) to $19,500 annually as of 2021.

Or, for those over 50, an additional $6,500 yearly. On occasion, an employer will contribute in a matching manner up to a predetermined level or percentage. Then, investors can choose from a range of vehicles through the employer’s 401(k) plan provider such as cash, bonds, stocks, and mutual funds. People might be allowed to borrow money against their 401(k)s depending on the 401 (k) plan provider. The IRS permits people to borrow up to $50,000, which is equal to 50% of their 40(k) amount.

The loan must also be repaid with interest. A sum that is typically at or somewhat higher than the prime lending rate. However, the 401k account receives the interest repayment. As the money will be reinvested in the 401(k) plan, the borrower is essentially paying interest to themselves. Unlike interest paid on conventional mortgages, 401(k) loan interest is not tax deductible.

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2. Roth IRA

Investing in real estate
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Investments made in a Roth IRA should be distinguished from those made in a 401(k) or standard IRA. Contributions for the former are made with pre-tax money. By doing so, a person’s adjusted gross income is effectively reduced, which can lessen their annual tax burden.

Contrarily, after-tax money is used to make contributions to a Roth IRA. As a result, the IRS permits people to take the principal from their Roth IRA for any reason without incurring any fines, penalties, or additional taxes. This makes a Roth IRA a fantastic choice for people who have been contributing to one for a long time. Due to Roth IRA contribution caps, the word “years” is crucial.

The IRS cap for Roth IRA contributions as of 2021 is $6,000 annually. Alternatively, $7,000 for anyone over 50. For simplicity’s sake, this means that a person who wants to invest $50,000 through their Roth IRA would have to have been contributing to a Roth IRA for at least 8.5 years prior to that moment.

Assuming they were funding their Roth IRAs to the fullest each year. To be clear, individuals are not permitted to withdraw any of the gains they have accumulated in their Roth IRA. Taxes and fines will be triggered by doing so. In a Roth IRA, only the principal contributions may be taken out.

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One exception to this regulation is that people are allowed to withdraw up to $10,000 in principal and interest from their Roth IRA solely to finance the purchase of a primary residence. But because this is not the same as investing in commercial real estate, various rules apply.


Moreover, 40(k) or Roth IRA investments in real estate are technically possible. In truth, most people use a different strategy when using their retirement money to invest in real estate. They make use of an SDIRA, or “self-directed IRA.” A self-directed IRA essentially allows people more control over how, when, and where they invest their retirement funds. An SDIRA provides access to a wide range of investment options, as opposed to regular IRAs or 401ks, which frequently restrict and prescribe how people should invest (i.e., in typical stocks, bonds, and other publicly-traded assets).

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Real estate, private equity, precious metals, cryptocurrencies, and other investments are all available through SDIRA. An individual must first convert their current 401(k) or IRA into an SDIRA in order to get started. Only prior employer 401(k) plans are eligible for this; current employer 401(k) plans are not (most people have switched jobs a time or two and have various plans to roll over or consolidate).

This transfer can be facilitated and the required papers can be supplied by the new SDIRA custodian. It should be noted that not all SDIRA providers permit real estate investment. Therefore, it is crucial to confirm that the SDIRA you select provides real estate investing as a choice. There are several SDIRA providers that are specifically designed to assist with real estate investment facilitation.

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Another strategy to take into consideration for those wishing to enter the real estate market more gradually is purchasing shares of a real estate investment trust with their retirement account (REIT). REITs are publicly traded and privately held businesses that own a variety of real estate assets. Some REITs are specialized and concentrate their investments in specific product categories (e.g., retail, multifamily, industrial) or in particular regions (e.g., Northeast, Midwest, Southeast). A person who invests in a REIT does not buy the actual real estate assets that the corporation owns; rather, they buy shares of the company that does.

To sum up, using retirement funds to purchase real estate may seem unusual, yet it happens more frequently than you might think. This is something that investors have done for years.

This article was written by Sophia Anderson and originally appeared on Your Coffee Break.

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