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How to Invest in Real Estate With Your 401(k)

September 28, 2022


  • There are nontraditional retirement plans specifically designed for direct real estate investment.
  • Some retirement plans offer the ability to take out loans, which can be used for any real estate needs.
  • Many traditional retirement plan providers offer investments in trusts or mutual funds that invest in real estate.

One of these options is real estate.

There’s more to a 401(k) than mutual funds, stocks, and bonds. Beyond traditional retirement plan options lies a group of investments called nontraditional or alternative investments. These plans allow you to pick and choose from specialized options not offered by your typical retirement plan provider.

If you don’t have a nontraditional plan that allows for direct real estate investment, don’t worry. There are other ways to use retirement funds to buy or invest in real estate. Here’s how it works.

Invest Directly in Real Estate With Your Nontraditional Retirement Plan

Some retirement plan providers offer access to direct investment in real estate.

In this case, your retirement plan owns the property of your choice and will track in price as the property value fluctuates. Once you reach retirement age or can make withdrawals without penalties, the property is yours to do with what you want.

Using a retirement plan to invest in real estate can be a tool to further diversify your investments beyond those traditionally offered.

However, some actions with your real estate investments are prohibited before reaching retirement age, such as:

  • Residing at the invested property
  • Managing the invested property
  • Using the invested property for anything personal (vacationing, personal events, etc.)

Despite these caveats, employers can use their nontraditional plan to buy a company building. If you find the perfect space for your business, but it’s a little out of your price range, it may be worthwhile to see if a nontraditional retirement plan can get you your ideal office space.

If you want to get started with a nontraditional plan, let us know. We’ll lead you through the process.

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Take out a Retirement Plan Loan

Loans taken from retirement plans operate like other loans. The funds that are withdrawn need to be paid back at a certain date with interest. 

The great thing about the interest on your retirement plan loan is that it is paid back to you. By taking out a loan and paying it back with interest, you are effectively paying yourself. 

To get the process started, participants can receive a loan application through their employer. However, before taking out the loan, it is important to be aware of your plan’s specific criteria for loans, which can change by law or by employer preference.

Most retirement plans offer loans but they are prohibited in IRAs.

Retirement Plan Loan Limitations

Two main loan restrictions are applied across all retirement plans. The first is that the interest on the loan must be reasonable. By reasonable, the IRS means equivalent to commercial lending interest rates under similar circumstances. The second is the amount that can be withdrawn, which depends on how many retirement plan loans the participant has already taken out and how much vested funds are currently in the participant's plan. 

Employers that offer loans can further customize when and how they offer loans, which could impact when and how participants take out loans.

If approved by the plan, the loan can be used for real estate uses such as down payments, home repairs, or any other real estate needs.

What’s great about this type of loan is the money never loses its tax benefits if it is properly repaid. However, If a loan is not repaid within the proper schedule, it will be taxed and incur a 10 percent penalty.

Invest in Real Estate Funds

Many retirement plans offer investments in funds that hold real estate. There are two main types of real estate investment funds.


REITs or real estate investment trusts are corporations, associations, or trusts that hold real estate. REITs invest in varying types of properties, from apartments to commercial properties, to residential real estate. You can choose which REITs to invest in to suit your needs.

Real Estate Mutual Funds

Real estate mutual funds operate like other mutual funds. Each share of a mutual fund contains fractional shares of a defined group of diversified investments. In other words, real estate mutual funds are groups of REITs that usually contain a variety of different types of real estate. While one share of a REIT might only invest in apartment buildings, one share of a real estate mutual fund might invest in homes, hotels, and commercial real estate.

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