Hello my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from Sarah. Sarah says, hi, I stumbled across your article on IRAs and real estate investing. I'm wondering if you have information on the pros and cons for using my 401k from a job 15 years ago for investing in rental properties. We currently have two rentals, wondering if it's even an option to use the 401k investment for purchasing rental properties and the pros and cons in doing so. I'm assuming one major contributing factor is how the 401k is growing currently.





Okay, Sarah? Well, thanks for the question. There's some things I just don't know that you haven't given me as far as information to be able to thoroughly answer your question, but I'll give you a 30,000 foot view answer to the question because you're going to have to check with your tax advisor about some of the options you have.

But it's good to know what some of those options are. So I'm assuming from your question that when you mentioned a job 15 years ago, I'm assuming that you don't mean that you've been in this job for 15 years, you just have held onto the 401k from a previous job and you haven't done anything with the funds and that's all well and fine if you are getting a good rate of return and you've just kept it in there. So one option is to roll the funds over into an IRA individual retirement account. Here's what I mean by that. So 401k plans are essentially longterm savings account and they offer tax advantages at least during the growth period of it to grow. Whatever savings you put in there between you and your employer. But with a 401k, you typically can make transfers or take loans against the 401k to access the funds and the investment because you can't pull the funds out without paying a penalty and taxes on it prior to age 59 and a half.

So what you're going to need to do here, especially if you are still employed in this 401k, is under management's being managed by your company or your retirement plan administrator. You're going to have to talk to them about this, but your 401k is restricted by law from investing in real estate. However, if you have this 401k and you're not tied to the original employer, so it's just sitting there and you haven't done anything with it, what you can do is you can roll it over, roll over your 401k into an IRA. Now, although you cannot invest directly in real estate with a 401k account, rolling it over into an IRA tax free, a self directed IRA will allow you to use those proceeds to invest in real estate. So that kind of frees up the shackles of what you can and can't do with it.

So that's something to seriously consider. Now, if that's not an option, you can usually borrow half of the value of your account up to about $50,000 if I'm not mistaken. However, if you purchase real estate with those funds outside of your 401k, you no longer have any tax advantages that are attached to the purchases made from the funds coming out of your 401k. Again, I'm going to repeat this a few times, but you need to talk to both the plan administrator for your 401k as well as your tax advisor because there are other rules and regulations and tax codes that come into play here. So you know this is a tax related question by far. If you roll it over into an IRA, then you are now able to self direct that IRA and purchase and invest in real estate income producing real estate within that IRA.

But if you do that, you need to monitor the cashflow. That's very important because if you purchase real estate through a retirement account, like a self directed IRA, all the funds used to purchase the property must come from that account. It all has to be arms length and any proceeds such as rental income or sales proceeds. If you sell that property must be returned back into the IRA. If you follow these restrictions, which is essentially what they are,