How You’ll Be Taxed Using 401k To Invest In Real Estate

How You’ll Be Taxed Using 401k To Invest In Real Estate

(ringing synthesizer) – [Toby] How would I be
taxed if I get a loan on a 401k to use towards buying real estate investment properties? Jeff, I know you’re
dying to answer this one. – [Jeff] I am dying to answer this one. Here’s the thing with a loan,
a loan is not a taxable event. The stipulation is that you have to repay the loan through your 401k plan. So, let’s say you take the maximum amount allowed out of $50,000. You’re going to need to repay that over a period of, I believe it’s 15 years. – [Toby] Five years.
– [Jeff] Five years. – [Toby] Yup, so here’s the deal. You have a 401k you can borrow
up to $50,000 per person, limited to 50%, so it’s
whatever’s less, 50% or $50,000. A husband and wife, then, could borrow – [Jeff] $100,000. – [Toby] 100 grand out of your 401k. Now, you say that’s great. I got it in an IRA. Well then you roll it into a 401k. You set up a company and you haven’t set up a full 401k to have it sponsored. Roll those funds in, then you get it. Now, that is not taxable to you. Now, Jeff, the big one is let’s say that I’m paying interest. Could I use that as investment expense, the interest that I’m paying back, because it is on a loan that is being used for the purchase of real estate. – [Jeff] I would want to say yeah. – [Toby] Yeah, I think so. So, how do you get taxed on it? You don’t get taxed anything on the money that you borrow, and you’d write off the interest, because you’re using it for your investment properties. – [Jeff] And here’s a nice
thing about the interest. You’re repaying the interest to yourself. – [Toby] Yeah, you’re getting
it back into that plan. You’re going to have to pay tax on it. – [Jeff] One day. – [Toby] Yeah, when you take it out after you turn 70 and a
half, and yeah, so like yeah. Unless it’s a, alright, unless it’s a Roth 401k and then we could — – [Jeff] Now one caveat on this, if you fail to make your
loan payments, as scheduled, then this no longer is a loan. It’s a distribution to you, and then, there are tax consequences. – [Toby] Yeah, the amount that you fail to pay back becomes a distribution, which means you get
penalties and you get to pay tax on it, so don’t
miss your payments. – [Jeff] Yeah.
– [Toby] If you borrow money out of a 401k, just make
sure you’re paying it back. – [Jeff] It’s really cheap
money if it’s a loan, it’s expensive it’s distribution. – [Toby] Alright, isn’t that fun? That’s why 401k’s rock, guys. If you use them, you can just
use them like a little bank, paying yourself back reasonable interest, and before you say, well I’m
going to pay it back 20% interest. You can’t. You have to use the federal AFR rates. We just use the, it’s
usually around 4% or 5%. It was down at like three. Now, it’s going up, but I wish they would quit raising interest rates. (rising synth) (upbeat synth and clapping)

2 thoughts on “How You’ll Be Taxed Using 401k To Invest In Real Estate

  1. Does this also apply to self directed ira

  2. I have a few hundred thousand in my 401k with the same employer i've been with since HS. I am nearly 40 and want to quit my company in 2019 so that I may pursue investing in real estate. How do I protect myself from taxation by using what's in my retirement funds to buy and possible flip real estate? I do not need to live off my investments at this time or when I resign with my 401k. I have side income and my partner can support our household expenses as I build more wealth.

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