Use Your 401(k) for Real Estate Like Never Before

In recent years using money from one’s 401(k) plan to invest in real estate has become more popular.  Essentially, you take a loan from your 401(k) to buy a property or use as a down payment.

There are specific rules and limits with it, but these have been relaxed in 2020 due to the CARES Act.

Use Your 401(k) for Real Estate Like Never Before

401(k) Loans Before

Normally you can borrow up to half of your balance, or $50,000, whichever is less.  If you do this, you have to pay the money back within five years and, while paying the loan interest to yourself.

401(k) Loans Now

With the CARES Act in effect loan limits have been raised to the lesser of 100% of the vested balance of your 401(k) or $100,000, so basically double the normal limit.

Additionally, people with existing loans that have repayments due between 3/27/2020 and 12/31/2020 can elect to delay them for 1 year.  Interest will continue to accrue, but the term of the loan will be extended accordingly.

The loan provisions apply to everyone, but there are further benefits for those impacted by COVID-19.

Coronavirus Related Distributions (CRD)

Eligible participants can take up to $100,000 from employer-sponsored 401(k) plans without being subject to the normal 10% early distribution penalty or the 20% mandatory tax withholding.

In addition, although the CRD will be treated as regular income, it can be spread over three years for tax purposes, and the distribution can be repaid without being subject to the normal 401(k) contribution cap.   As long as it is paid back in three years tax is avoided.

This option is available for all of 2020, but only for those who qualify as impacted by COVID-19, which consists of a few things, one of which is:

  • They have lost a job, been furloughed or otherwise suffered a heavy financial burden because of COVID19 (including loss of childcare)
Diversification Option

Most people’s 401(k) plans are heavy in stock.  Real estate is a way to diversify and these temporary options give us the opportunity to do that if we wish.

Remember, just like any investment be sure to BUY RIGHT!  Analyze your properties with the property calculator and if you are just starting out in real estate investing the ScaredyCatGuide to Investing in Rental Properties Videos are a great resource!

 

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