How to Grow Your 401k Nest with Real Estate


Are you looking for solid investment options to grow your 401k retirement nest? Well, real estate is one such option which when invested in carefully can garner great profits for your retirement nest. An important advantage is that by investing in real estate with your 401k plan, you can earn tax-free profits and pay taxes at a later date in future, rather than in the year in which income is generated.

You can choose from multiple options for investing in real estate. Such as:

  • Rental property – multi-family and single-family units
  • Raw land
  • Timber land
  • Industrial and commercial property
  • Farm land
  • Real estate notes
  • Apartments
  • Condos
  • Duplexes
  • Private mortgages
  • Tax liens certificates

Guide for Investing in Real Estate With Your Self Directed 401k:

  • Firstly, talk to a professional self-directed IRA custodian. You may have dealt with or be currently dealing with a broker for transactions in real estate. However, he or she may not be capable of handling 401k investments in real estate. Hence, it is best to take professional help.
  • Chart out the parameters for a good property and find one accordingly so that the benefits it garners in future adds to your 401k retirement nest.
  • Next, you need to add funds in your 401k for this investment. You can do this by either contributing to that retirement nest, or transfer funds in it from another IRA or rollover the funds from your other 401k.
  • It is important that you do not append your signature anywhere because then you will not be listed as the owner of the property you invest in. Instead, your 401k will own the property and the will.
  • You need to close on the property which is similar to the process of closing on a personal property with an exception that in this case your IRA will be buying the property. Ensure that your IRA has all the funds including the closing fees.

Rules and Regulations to Follow:

  • You don’t need 100% funding from your 401k to purchase property. There are many options other than an outright purchase of property using the full amount from your 401k retirement nest. For instance, you can use undivided interest and partner with others. You can also choose to finance an investment with your 401k. But, this investment should be structured carefully.
  • If you have invested in real estate with your self directed 401k, all the expenses associated with this property such as property taxes, general bills, maintenance, condo association fees etc., must be paid from that 401k only.
  • All income generated from the property you purchase with your self directed 401k must be paid back into that 401k only.
  • One of the restrictions of using 401k to invest in real estate is that you cannot use your 401k retirement to purchase a property owned by you or a disqualified person. IRS regulations do not allow such transactions as they are considered as ‘self-dealing’. Hence, they don’t permit purchase from or selling property to any of disqualified person, including yourself with your self directed 401k.
  • The property owned by you through your self directed 401k cannot give you any “indirect benefits”. For instance, you cannot rent an office space for yourself in a building which is bought by your 401k. Your self-directed 401k cannot be used to purchase a vacation home for personal use even occasionally. If your 401 k is used for a transaction which benefits you (or any other disqualified person), then it is considered as an ‘indirect benefit’.

Hence, with carefully planned real estate investments you can garner some solid profits to grow your 401k retirement nest.  Ensure that you follow all the associated rules and regulations associated with such investments. Talk to a professional with experience in such investments.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, Arizona. He has over three decades of experience working with investments and retirement planning and, over the last 20 years, has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com.