Education, Finance, Investment Advice
smartland-4-Ways-to-Leverage-Your-Retirement-Accounts-to-Invest-in-Real-Estate.mp3 Here are four ways to leverage your retirement accounts to invest in real estate. A 401k is a retirement savings vehicle that allows... Listen to this article

Many prospective real estate investors want to gain a foothold in the industry but are unsure where to begin. Historically, commercial real estate has had high barriers to entry. The up-front capital costs can be steep, so buying a property outright is often out of the question for many.

What’s more, those who do invest will find that real estate investments are illiquid. Real estate cannot be as easily purchased and sold as stocks, bonds and other equities. Therefore, investors who do have cash on hand are often hesitant to invest in commercial real estate. Simply out of fear that they will not be able to access those funds for other purposes if need be.

For these investors, a great alternative is to consider investing in real estate using their retirement accounts. Most people do not even know this is an option. There are many benefits to investing through a retirement account, though.

For example, more retirement funds restrict withdrawal ahead of retirement age. This means these funds are already illiquid (unless an investor wants to pay steep early-withdrawal penalties).

In this article, we look at four ways to invest in real estate using your retirement accounts.

01 Consider a loan against your 401kConsider a loan against your 401k

What is a 401K?

A 401k is an employer-sponsored retirement account. It allows employees to dedicate a percentage of their pre-tax income to a retirement account. As of 2021, the IRS caps individual contributions to $19,500 per year. Or an additional $6,500 per year for those over the age of 50.

Sometimes, an employer will make a matching contribution up to a certain percentage or threshold. The employer’s 401k plan provider allows investors to then select from a variety of vehicles. Such as stocks, bonds, mutual funds and cash.

Video Placeholder
play icon

Depending on the 401k plan provider, individuals may be able to take out a loan against their 401k. The IRS allows individuals to borrow up to $50,000 or half of their 401k balance (whichever is lower). You can then use this loan to invest in real estate.

Stipulations when using 401K

Of course, when borrowing against your 401k there are rules to follow. For example, you must repay the loan within five years to keep the funds tax-free.

While the IRS prohibits 401k plans from investing in real estate directly,
this does not mean a 401k cannot
otherwise be leveraged to purchase an investment property.

In addition, you must repay the loan with interest. An amount that is usually at or just above the prime lending rate. However, you will pay that interest back into your 401K. This means the borrower is essentially paying themselves interest as they will reinvest those funds in the 401K plan.

Unlike interest paid on traditional mortgages, the interest paid on 401k loans is not deductible.

02 Leverage the principle from your Roth IRA to invest in real estateLeverage the principle from your Roth IRA to invest in real estate

It is important to make a distinction between investments in a 401k or traditional IRA and a Roth IRA. With the former, contributions are made using pre-tax dollars. Doing so effectively lowers an individual’s adjusted gross income, which can reduce their overall tax burden each year.

Roth IRA

On the other hand, you use after-tax dollars to make contributions to a Roth IRA. As such, the IRS allows individuals to withdraw the principal from their Roth IRA for any purpose without facing fines, penalties or subsequent taxation.

Video Placeholder
play icon

This makes a Roth IRA a great option for those who have been investing in a Roth IRA for years. The “years” part is important. This is because of the caps on Roth IRA contributions. As of 2021, the IRS limit for Roth IRA contributions is $6,000 per year. Or $7,000 for those aged 50 and above.

This means that someone who wants to invest $50,000 in a commercial real estate deal using their Roth IRA would need to have, for example, been investing in a Roth IRA for at least 8.5 years leading up to that point. This is also making the assumption that they were maxing out their Roth IRA each year.

To be clear: individuals cannot withdraw any of the income or earnings that they’ve realized in their Roth IRA. Doing so will trigger both taxes and fines. You can only withdraw the principal contributions from a Roth IRA.

There is one exception to this rule: Individuals may withdraw up to $10,000 in principal and interest from their Roth IRA. Solely for the purpose of investing in a primary residence. This is different than investing in commercial real estate, though, and therefore, different rules apply.

03 Invest in real estate through a self-directed IRAInvest in real through a self-directed IRA

Although it is technically possible to invest in real estate using a 401k or Roth IRA. In reality, most people utilize a different approach to investing in real estate using their retirement accounts. They use a “self-directed IRA” or SDIRA.

In short, a self-directed IRA gives individuals greater autonomy over how, when, and where they can invest their retirement savings. Unlike traditional IRAs or 401ks, which tend to limit and prescribe how people invest. (i.e., in traditional stocks, bonds, and other publicly-traded equities), an SDIRA opens the door to an array of investment alternatives. Through SDIRA, people can invest in real estate, private equity, precious metals, cryptocurrency and more.

Video Placeholder
play icon

To get started, an individual must first roll their existing 401K or IRA into an SDIRA. This can only be done with previous employer 401k plans—not current employer 401k plans (most people have switched jobs a time or two and have various plans to roll over or consolidate).

The new SDIRA custodian can help facilitate this transfer and provide the necessary paperwork.

Note: not all SDIRA providers allow people to invest in real estate. So it is important to make sure the SDIRA you choose offers real estate investing as an option. You should consider certain SDIRA providers that are explicity set up to help facilitate real estate investments.

Once you transfer funds into an SDIRA account, you may use them to invest in real estate. However, you should keep in mind that there are several nuances associated with SIDRA real estate investing. Here’s what investors need to know:

  • The SDIRA custodian will not be providing guidance about real estate investments. Therefore, it is up to the individual investor to do their due diligence on prospective real estate deals. 
  • The investors must maintain an “arm’s length” distance from the asset. In other words, you cannot live in or actively manage the property. You are required to hire a third-party to manage the property on your behalf.
  • You can use the property only for investment purposes and not as a primary residence, vacation home, for your business, etc.
  • The IRS prohibits “disqualified persons” from being involved in any SDIRA investment in real estate. Disqualified persons include spouses, family members, plan service providers and fiduciaries, and any entity (corporation, partnership, etc.) in which you own at least 50% of the voting stock. The involvement of a “disqualified person” – such as the purchase of investment property from a family member – will result in the investment being considered a “prohibited transaction”. Prohibited transactions can result in the forced sale of assets and steep taxes and/or penalties.
  • The custodian of the SDIRA will hold the title to any investment property, not the individual. However, it will be held on the individual’s behalf.
  • This is to ensure the investor keeps an arm’s length distance at all times.
  • If an individual purchases real estate directly through an SDIRA (as opposed to using their SDIRA to invest in a syndication or a fund). The account holder will want to have sufficient reserves set aside to fund repairs and maintenance. The SDIRA must also fund these as the owner of the property. 
  • The income generated from a real estate investment, including monthly cash flow and sales proceeds. In order to retain its tax-deferred status, must return it to the SDIRA account. This means an individual cannot pocket their earnings as they might be able to with a traditional (non-SDIRA) real estate investment.
  • Using leverage can potentially create tax issues. The IRS prohibits SDIRA account holders from personally guaranteeing loans associated with their investment accounts. Non-recourse loans may be an option. However this may also trigger “unrelated business taxable income” (UBTI) rules which have their own tax implications.
  • Because a self-directed IRA is not required to pay taxes. Investors will not benefit from the traditional tax advantages (e.g., depreciation) associated with owning investment property.

04 Use your retirement account(s) to buy REIT stockUse your retirement account(s) to buy REIT stock

Those looking to dip their toes into the real estate waters more gradually may want to consider a fourth approach. Using their retirement account to buy stock in a real estate investment trust (REIT). REITs are publicly- and non-publicly traded companies that own various real estate assets.

Some REITs are specialized and focus on investing in particular product types (e.g., retail, multifamily, industrial). Or in specific geographies (e.g., Northeast, Midwest, Southeast). When investing in a REIT, the person is investing in shares of the company that owns the real estate – not the actual real estate assets owned by that company.

Video Placeholder
play icon

You can invest in REITS fairly easily by using traditional 401Ks and IRAs. Someone who converts their retirement account to an SDIRA can make both direct investments in real estate and REIT investments.

Benefits of investing in REITs

The primary benefit to investing in REITs is that they offer the most flexibility and liquidity. There are very low barriers to entry. Individuals can purchase single shares for less than $100 a piece, and can continue to invest at their leisure as they have funds available.

Moreover, the low investment minimum allows people to invest in multiple REITs if they so choose. This is a way to mitigate risk when investing in any one asset class.

A REIT is similar to a mutual fund except that it is obligated to invest in real estate, mortgages, and other real estate-related assets.

In terms of liquidity, REIT shares can be easily purchased and sold. Unlike a more substantial investment in syndication, fund or individually-owned real estate. You can liquidate REIT shares without penalty just like you would sell other stocks and bonds.

Reasons to Invest in Real Estate with Your Retirement Account

As noted above, the most popular way of leveraging retirement. There are many reasons for investors to consider using their retirement account(s) to purchase an investment property. These reasons include:

More control over investment decisions.

As noted above, traditional 401k and IRA plans limit individuals to certain investment vehicles. In turn, many people find their retirement portfolios overwhelmingly concentrated in stocks and bonds. When you roll these accounts into an SDIRA, its gives you more flexibility to allocate your retirement funds into real estate and other options.

Greater portfolio diversity.

Most retirement advisors urge people to have the majority of their investments concentrated in some combination of stocks, bonds, equities and cash. Few people invest any money in alternative asset classes because they view these investments as riskier. In turn, an investor is putting their portfolio at risk to the stock market’s daily ebbs and flows which can sometimes be dramatic.

This is especially risky for investors looking to retire in the near future. If the stock market crashes, the value of their retirement accounts will plummet and these investors may not have the time to recover those losses ahead of their intended retirement date. Investing in real estate is a great way to diversify away from the volatility that is often found within that of traditional stocks, bonds and equities.

Ability to earn tax-free income.

SDIRA investments in real estate generate tax-free revenue which is returned to the SDIRA account. These funds can be reinvested time and again, which helps investors grow their portfolios faster than if they were earning less total revenue after taxes.


While it may seem unconventional to invest in real estate using your retirement accounts, it is actually more common than you might expect. Investors have been doing this for decades.

Are you an investor who wants to take control over your financial future? Consider investing in real estate today. Real estate is a proven way to generate passive income and protect wealth against economic fluctuations. What’s more, doing so through an SDIRA account allows investors to realize tax-free growth that can significantly affect their future wealth. 

Contact us today to learn more about investing in Smartland’s platform using your retirement accounts.

Last edited on March 27, 2023
Was this article helpful?
reaction thumbnail No

View More