How Your 401(k) Can Help You Buy Property Today

As people get closer to retirement age, they may look for ways to increase their savings and income to help them prepare to exit the workforce. Many invest in real estate to make more money, as property can often be a great asset that holds its value for an extended period. 

If you have a 401(k) for retirement savings, you may be able to take advantage of some of its benefits early by using it to purchase property. Here’s some information about how your 401(k) can help you buy property today.

Key Takeaways

• You can buy property with your 401(k) by withdrawing money early or taking out a loan from your account.
• Buying property with a 401(k) offers benefits, such as no taxes on rent, no capital gains tax after your purchase, and the opportunity to earn additional income.
• There are alternatives if you don’t want to withdraw funds early from your 401(k), such as government-funded mortgage programs and individual retirement accounts.

Using a 401(k) Loan To Buy Property

You can take a loan from your 401(k) to buy property, which involves withdrawing money and creating a plan to pay it back into your 401(k) over a specified period. This can be advantageous if you want to purchase a home quickly and have a built-in plan for replenishing your retirement savings. You also won’t face a penalty for early withdrawal or pay additional income tax on the money you take out.

In most cases, you’re allowed to withdraw either $10,000 or half the amount you’ve contributed to your plan. Before withdrawing the money, you should discuss the process with your loan provider, as some lenders have varying requirements for 401(k) loans. Your loan provider can also tell you what your interest rate will be and how much tax you’ll have to pay on repayments, as this will differ from what you pay on initial contributions.

Using a 401(k) Withdrawal To Buy Property

Early withdrawal is another way to use your 401(k) account to buy property. The rules around what qualifies as an early withdrawal can vary slightly, depending on your lender, but it typically means taking money out before turning 59-and-a-half. You can withdraw money from your 401(k) to purchase property before this age, but you’ll likely have to pay a penalty, which is typically around 10%. You may also be liable for income tax on an early withdrawal.

Some exemptions can make early withdrawal easier. For example, if you have a Roth IRA, which is a different type of savings account than a 401(k), you typically have the freedom to withdraw money that you’ve contributed at any time without extra cost since you’ve already paid taxes on these funds. The second most common exemption is a qualifying life event, such as medical expenses or impending foreclosure. Some loan providers also give special exemptions if you’re seeking to withdraw money to cover a down payment for property.

Benefits of Using Your 401(k) To Buy Property

Here are some of the benefits when you invest in property using your 401(k): 

No Taxes on Rent

Perhaps the greatest benefit of using your 401(k) to purchase property is that you won’t have to pay taxes on rent, should you choose to rent out the property. This is because you can deposit the money you earn from charging rent directly into your 401(k) account, which acts as a repayment for withdrawing some of your initial contributions. Because you purchased the property with money already in your account, you won’t pay tax on it again when you receive it back as rent payments.

No Capital Gains

Another key benefit is that you won’t have to pay capital gains tax if you sell the property later. Most real estate transactions involve paying capital gains tax when selling a property, but since you used money that you already had designated to your savings to purchase the home, you won’t have to do so here. Different from using money in your checking account, this can save you money overall and provide a good return on your investment should you decide to sell the property.

Opportunities for Extra Income

Another key benefit of using your 401(k) to buy property is that it can give you additional options for income. Many homeowners purchase property to use as a short-term rental, while others reserve the property and stay in it for a short period. While there are a few steps to take before you can list your property as a short-term rental, such as filing paperwork or signing up with a rental service, this is typically a simple way to get quick returns on your property investment.

Renting out your new property can be an effective way to earn extra income; you can return the rent to your 401(k) to reduce the loss from your initial investment. It can also boost your savings, as you’ll have a steady income stream that you didn’t have before.

Alternatives To Buying Property With Your 401(k)

While using your 401(k) to buy property can be lucrative when done carefully, there are some reasons why people may look for alternatives. For example, you may want to preserve your 401(k) balance for as long as possible to ensure you have liquid assets when you retire. This is because making a premature withdrawal from your 401(k) can greatly reduce your retirement savings, even if you put money back into your account after buying real estate. Here are a few alternatives for buying property if you don’t want to use your 401(k):

Wait to Purchase

If you’re unsure about whether you have enough cash to purchase property, you may consider waiting a while before buying a piece of real estate. This can give you more time to save money for a down payment and the extra costs of homeownership that may follow the initial purchase. By waiting to purchase, you can track the real estate market in your desired area and make an offer during a buyer’s market, when you can get the best deal.

Use an IRA

An IRA is another type of retirement savings account that can sometimes be helpful when purchasing a home or other property. IRAs usually have stipulations that allow you to withdraw a certain amount of money specifically for buying property. With an IRA, you won’t incur penalties for withdrawing money before you retire, while you may find that penalties apply when trying to withdraw from your 401(k) before retirement.

If you have a Roth IRA, you can enjoy even more freedom in terms of early withdrawals. These accounts allow you to withdraw money from your contributions at any time. They also allow contributors who are at least 60 years old to withdraw money that they’ve earned in the account over time.

Explore Mortgage Programs

The government provides several mortgage programs that help people buy property by qualifying them for a reduced down payment. You can take advantage of this if you want to avoid paying a large down payment that you would need to withdraw from your 401(k). For example, some of these programs allow you to purchase a home with down payments as low as 3.5%, which is far lower than the typical 20% that you pay to commercial lenders and banks.

Education

Regardless of your financial situation, it can always be helpful to consult professional advisors before making financial decisions. Infinity Investors has you covered, as we offer an array of products and memberships that give you access to expert-level financial advice and exclusive resources that can help you build wealth and invest strategically. Consider purchasing an Infinity Membership to take advantage of all the knowledge and guidance we can offer.

If you want to buy property before your retirement, using your 401(k) can be a good option. These are just a few ways that you can take advantage of your savings and make them work for you before you retire. If you’re ready to start putting your 401(k) toward a new home, consider the benefits and meet with a financial advisor to get moving on the next steps.