Using a traditional 401(k) to buy property isn’t straightforward because most employer-sponsored plans limit your options to stocks, bonds, and mutual funds.
If you’re trying to figure out how to use 401k for real estate investment, you’ll quickly run into IRS restrictions that block direct purchases of property.
Some investors try to bypass this by opening self-directed IRAs, but those come with fees, custodial oversight, and a long list of rules.
Even then, you might not capture the full tax benefits that real estate can provide.
Cashing out your retirement account is another route, but it’s costly. If you’re under 59½, you’ll pay a 10% early withdrawal penalty — plus income tax on the entire amount.
That shrinks your investment capital and ends the tax-deferred growth your 401(k) would have provided.
Still, if you’re serious about investing your 401k in real estate, you do have options.
And in this blog, we’re breaking down those options to make it easier to understand how to use 401k to invest in real estate and stretch your retirement dollars into commercial property.
Invest in REITs through your current 401(k)
Many employer-sponsored plans don’t allow direct real estate investment, but some do provide access to real estate investment trusts (REITs).
These publicly traded securities give you indirect exposure to commercial properties, and they can be included in traditional 401(k) menus.
While this isn’t the same as owning property, it’s a straightforward way to add real estate to your retirement portfolio without rolling funds into a new account.
Roll over an old 401(k) into a self-directed IRA
Do you have a 401(k) from a previous employer?
You can roll it into a self-directed IRA (SDIRA) to access commercial real estate and other alternative investments that aren’t allowed in a typical employer-sponsored plan.
As long as you process the rollover as a direct transfer, you won’t trigger taxes or early withdrawal penalties.
Once the funds are in the SDIRA, you can use them to buy and manage commercial property — provided that you follow IRS rules closely.
That means that you cannot use the property for personal purposes. You must get a fair market valuation of the asset and keep proper documentation.
If you finance the purchase with a non-recourse loan, you may owe unrelated business income tax (UBIT) on the income generated.
SDIRAs have lower annual contribution limits than 401(k)s, but rollovers don’t count toward those limits so you retain full access to the funds you transferred.
This route usually isn’t available for your current 401(k) unless your plan allows in-service rollovers (which are rare).
But if you’ve left a job, rolling over that account into an SDIRA lets you access investment types not allowed in a standard retirement plan.
Use a self-directed solo 401(k)
Are you self-employed or run a business with no full-time employees other than a spouse?
You might want to look into how to invest 401k in real estate using the self-directed solo 401(k) plan.
This lets you invest in alternative assets (including commercial real estate), unlike traditional plans that limit you to stocks and mutual funds.
You can also borrow up to $50,000 or 50% of your account balance (whichever is less) to fund a real estate deal.
However, any money related to the investment (whether it’s rent income or expenses) must flow in and out of the 401(k) account.
You’ll also need to avoid any prohibited transactions, like buying property for yourself or involving family members who fall under IRS restrictions.
Use ROBS to launch a real estate business
If you’re serious about real estate and want to use retirement funds without triggering taxes or penalties, Rollovers for Business Startups (ROBS) gives you a legal way to do it.
This method lets you move money from a 401(k) or IRA into a new C Corporation, which you then use to start a real estate business.
You create a retirement plan inside the new company — usually a 401(k) — and use that plan to buy stock in the company.
That puts the funds into the business account where you can use them to acquire properties and pay for operating costs.
ROBS is worth a look because you don’t take on debt, you don’t go through a bank, and you keep the tax advantages of a qualified retirement plan while investing in real estate.
Let’s walk through how to invest 401k in real estate through ROBS:
- Decide how much of your retirement funds you want to use. Most investors start with at least $50,000.
- Set up a C Corporation. Only this structure allows you to issue Qualified Employer Securities, which ROBS requires.
- Open a 401(k) inside the C Corp and roll over your retirement funds into it.
- Use the 401(k) to purchase stock in the corporation. The funds now sit in your business account and are ready to deploy.
To stay compliant, you must follow IRS and Department of Labor rules. You need to act as an active employee in the business (you can’t remain passive).
The real estate company must also be US-based and involved in ongoing operations (not just holding assets).
ROBS is one way to take control of your retirement funds and use them to build long-term equity through real estate.
If you’re exploring how to use 401k for real estate investment and want to avoid loans or taxes, this structure makes it possible.
Investing 401k in real estate by cashing out and offsetting taxes
Some investors skip structures like self-directed IRAs and simply cash out their retirement funds.
Of course, this route triggers income tax and a 10% penalty if you’re under 59.5 years old.
The total hit can be more than 40%, which is why most advisors tell people to avoid it.
But experienced investors use this method differently. They combine the withdrawal with a large commercial real estate purchase (usually multifamily CRE) and apply depreciation to offset the tax.
To make this approach work, you use cost segregation to front-load depreciation.
Identify items in the building that qualify for accelerated write-offs (appliances, flooring, wiring, etc).
If you can match the first-year depreciation to the income triggered by the 401(k) withdrawal, you can erase the tax bill.
Only the 10% penalty remains, and compared to long-term loan interest, that cost may be smaller. Let’s look at a simplified example:
Let’s say you buy an 8-unit apartment building for $640,000 with 10% down and seller financing.
You cash out $80,000 from your 401(k) to cover the down payment and closing costs.
You incur a $28,000 liability ($20,000 in tax and $8,000 in penalties).
A cost segregation study shows $80,000 in accelerated depreciation in year one.
That depreciation wipes out the $20,000 tax. The $8,000 penalty remains but is already included in your withdrawal amount.
This method lets you use retirement funds for a real estate deal without permanent tax loss.
You get cash flow, property ownership, long-term equity, and ongoing depreciation benefits.
401k vs. bridge loan: Which makes more sense for your next deal?
A commercial real estate bridge loan gives you short-term financing without touching your retirement savings.
You keep your 401(k) intact and avoid tax penalties, and you don’t risk disqualifying a retirement plan.
It’s fast — but bridge loan interest rates are on the high side, and terms are as short as 6 to 18 months, which is fine if you already have a refinance lined up or you plan to sell quickly.
If you’re short on liquidity but confident in your exit strategy, a bridge loan buys you time.
If you have a solo 401(k), you can borrow up to $50,000 or 50% of your balance.
It’s your money — which means that there is no need to go through a credit check and you don’t have to pay interest paid to a lender. You repay the loan back into your account.
If you need more than $50,000, you could cash out or use a ROBS structure to fund a real estate business.
This lets you use more capital but it also means having to comply with tax rules and a lot more paperwork. You must stay hands-on with the business because passive investing isn’t allowed.
The real comparison: The right answer depends on your cash needs, tax situation, and how active you want to be in managing the deal.
A bridge loan costs more in interest but doesn’t touch your retirement. Using a 401(k) loan is cheaper but capped.
Cashing out gives you full access, but you pay penalties unless you offset them with depreciation.
Looking beyond your 401(k) or a bridge loan?
If you’re ready to buy commercial property but need funding beyond traditional routes, we can help. At Private Capital Investors, we provide short-term loans secured by commercial real estate.
Our clients count on us both as direct private lenders and long-term advisors with access to a broad network of capital sources.
We maintain strong correspondent relationships with life insurance companies, banks, CMBS lenders, hedge funds, and private investors across the globe, so we can find the structure that fits your deal.
Call us at 972-865-6206 or use our loan request page to get started.
Sources
- https://smartasset.com/retirement/how-to-use-401k-to-invest-in-real-estate
- https://en.wikipedia.org/wiki/Solo_401%28k%29
- https://finance.yahoo.com/news/ever-retirement-funds-buy-house-130025418.html
- https://www.madisontrust.com/how-to-convert-a-401k-to-real-estate/
- https://www.guidantfinancial.com/blog/401k-real-estate
- https://www.commercialpropertyadvisors.com/how-to-use-401k-retirement-money-to-invest-in-commercial-real-estate/
