Leverage Your Retirement Funds to Invest in Real Estate

Leverage Your Retirement Funds to Invest in Real Estate

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“The best investment on earth is earth.” Louis Glickman

If you’re a real estate investor, either experienced or just starting out, you are likely to agree with Mr. Glickman. As a real estate investor, being able to leverage credit is one of the best superpowers one could ask for. The only problem is being able to jump through every hoop and step over all the red tape to qualify for a mortgage , which can often limit us to the number of homes we can buy.

Have you ever thought about using your retirement funds to invest in real estate?

The IRS allows investing in real estate through qualified retirement plans. Custodians and retirement plan providers, however, are the one who may restrict investment options to what they offer. The self-directed Solo 401k is one of the most popular retirement plans among full-time real estate investors, allowing them to add real estate to their retirement portfolio.


Solo 401k is a qualified retirement plan for owner-only businesses, self-employed professionals, and individuals with part-time self-employment activity. It has gained popularity over the last several years, primarily because of the investment freedom and higher contribution limits.

Important facts to know about Solo 401(k) plans

  • Contribution limits: $53,000 for 2016 (+$6,000 for professionals above 50 years)
  • Important dates: Last date to establish Solo 401k is December 31 of the year for which contributions are to be made. You can elect to make contributions by December 31, and profit-sharing contributions can be made until the regular tax-filing deadline plus extension.
  • Participant loan: Borrow up to 50% of account balance with a maximum limit of $50,000 per participant.
  • Roth contributions: Contribute after-tax dollars to a Roth Solo 401k retirement plan irrespective of your income threshold.
  • UBIT exemption: You receive UBIT exemption against non-recourse financing.
  • Multiple investment options: Invest in real estatetrust deeds and mortgages, tax liens/deeds, private equity, private lending, precious metals, stocks & bonds, and similar creative investment options.

How to invest in real estate with a Solo 401(k)?

Step 1: Establish a Solo 401k retirement account through a Solo 401(k) provider.

Step 2: Rollover funds from existing IRA, 401k, or other qualified retirement plans into your Solo 401k account. The only rollover exemption is through a Roth IRA, so you won’t be able to rollover those funds.

Step 3: Choose a property that you would like to purchase through your retirement plan, and perform the due diligence.

Step 4: Once you’re ready for the purchase, release funds from your retirement account to purchase the property. If you do not have sufficient funds to complete the transaction, use non-recourse financing to fund the deal.

Step 5: Your Solo 401(k) plan will hold the title of the property, and you will sign on its behalf, as the manager/trustee of the plan.

Step 6: Any income yields from the property will go directly into the Solo 401(k) plan. Similarly, your Solo 401(k) plan would bear any maintenance or repair costs.

Voila, you have successfully added real estate in your retirement portfolio!

Do’s and Don’ts of investing in real estate with a Solo 401(k)

  • Never use personal funds in Solo 401k-owned real estate: Be it while you are funding the property or incurring any maintenance/repair expenses, you can never use personal funds for a plan-owned property. It will be considered a prohibited transaction, hence leading to some regulatory penalties.
  • Plan owner should not benefit personally from the property: If you have a property in your Solo 401k retirement portfolio, under no circumstances can you benefit personally from it, meaning you cannot use it as your personal residence/office space or pocket the rental income directly. The rule also forbids other disqualified persons – such as the spouse, parents or children of the participant – from personally benefiting from the investments.
  • Use nonrecourse financing only: The IRS allows use of non-recourse financing for purchasing real estate through a Solo 401k plan. Unlike IRA plans, a Solo 401k can obtain non-recourse loans without triggering the Unrelated Business Income Tax (UBIT).
  • Hire a thirdparty service for property management: You need to hire a third-party property management/repair service for the maintenance of the property. Further, you cannot hire any disqualified professionals for the job.

Choose a Solo 401k provider wisely

Solo 401k, when coupled with all the available investment options, is a powerful tool for wealth creation. However, not every plan provider offers the features you would like to have in your retirement plan.

Things to consider while choosing a Solo 401(k) provider

  • Checkbook control: Choose a provider that offers checkbook control, which allows you to invest at your sole discretion. In absence of this feature, you will waste a lot of time in getting the necessary custodial approval.
  • Investment options: Some providers may restrict the investment options to their financial products only, hence restricting the investment capabilities of a Solo 401k plan. At the same time, their plan may lack non-traditional investment options.

Considering the key factors and benefits of Solo 401k retirement plans, there’s no doubt that it can be one of the wisest financial decisions you’ve ever made.


Guest Blogger: Dmitriy Fomichenko

President of Sense Financial Services LLC

Mission Real Estate Solutions LLC
661-505-8521   andrew@missionrealestatesolutions.com
Invest in your future!

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