Education, Finance, Investment Advice

4 Ways to Leverage
Your Retirement Accounts
to Invest in Real Estate

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 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, which means these funds are already illiquid (unless an investor wants to pay steep early-withdrawal penalties). While these funds may be “inaccessible” for personal use, they can be used to invest in an array of other asset classes – such as real estate – as we’ll discuss below.

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

A 401k is an employer-sponsored retirement account that 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.

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). This loan can be used to invest in real estate.

Of course, there are stipulations associated with borrowing against your 401k. For example, the loan must be repaid within five years in order for the funds to retain their tax-free status.

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, the loan must be repaid with interest, an amount that is usually at or just above the prime lending rate. However, that interest is repaid into the 401k account, so the borrower is essentially paying themselves interest as those funds will be reinvested 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

There is an important distinction to be made 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. Contributions to a Roth IRA, on the other hand, are made using after-tax dollars. As such, the IRS allows individuals to withdraw the principle from their Roth IRA for any purpose without facing fines, penalties or subsequent taxation.

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 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 simplicity’s sake, have been investing in a Roth IRA for at least 8.5 years leading up to that point (assuming 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. Only the principal contributions can be withdrawn 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 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 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 what’s known as a “self-directed IRA” or SDIRA.

In short, a self-directed IRA gives individuals greater autonomy over how, when and where they 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.

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. Some SDIRA providers are explicitly set up to help facilitate real estate investments, so these are certainly providers to consider.

Once funds have been transferred into an SDIRA account, they may be used to invest in real estate. There are several nuances associated with SDIRA 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. 
  • Investors are required to keep an “arm’s length” from the asset. In other words, you cannot live in or actively manage the property. You must hire a third-party to manage the property on your behalf.
  • The property must be used solely for investment purposes. It cannot be used 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 title to any investment property will be held by the custodian of the SDIRA, not the individual, but will be held on the individual’s behalf.
  • All property management and operations must be managed by a third-party 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, which must be funded by the SDIRA as the owner of the property. 
  • The income generated from a real estate investment, including monthly cash flow and sales proceeds, must be returned to the SDIRA account in order for it to retain its tax-deferred status. This means an individuals 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, as the IRS prohibits SDIRA account holders from personally guaranteeing loans associated with their investment accounts. Non-recourse loans may be an option, but 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, a person is investing in shares of the company that owns the real estate – not the actual real estate assets owned by that company.

Investing in REITs is straightforward and can be done with traditional 401ks and IRAs. Someone who converts their retirement account to an SDIRA can make both direct investments in real estate and REIT investments.

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, which 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, REIT shares can be liquidated without penalty just as someone might 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. Rolling these accounts into an SDIRA gives investors more flexibility with how their retirement funds are allocated, in real estate and otherwise.
  • 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. Very few allocate any funds to alternative asset classes, like real estate, since these are considered “riskier” investments. 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 traditional stocks, bonds and equities.

  • Ability to earn tax-free income. Any revenue generated by an SDIRA investment in real estate is returned back to the SDIRA account and is considered tax-exempt. 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.

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