There are many reasons why a self employed person would want to ask themselves “Can I take money out of my 401k to buy an investment property?” A typical retirement account holds a pre-determined amount of money that is available to the account holder through a variety of means. These may include deposits from paycheck, rollovers from the account, and direct deposits from the government. Some account holders may even choose to borrow money from their retirement accounts in order to purchase investment properties. However, as with any other type of borrowing, there are some risks that must be weighed against the potential rewards.
One of the most common ways that a self employed individual will use funds in their retirement account to purchase real estate is by borrowing against the account. A typical scenario involves a mutual fund account that requires regular contributions in order to meet certain minimum requirements. When the account holder reaches his or her required minimum contribution amount, they may choose to borrow funds from their account in order to make necessary renovations, increase their home’s equity, or purchase a vacation home. While this option may allow the account holder to utilize the funds in their account for their personal needs, this is not generally recommended for individuals who are planning on selling their investment property in the future.
Self employed individuals are also advised against borrowing money from their 401k in order to purchase investment properties. One of the primary reasons why this is so is because the IRS taxes any investment returns that a person earns from these types of accounts. The rate that the IRS charges for tax-deferred investments is currently 8%. If the account holder is able to deduct the interest on their current self employed mortgage, they may be able to significantly reduce their taxable income. However, if they take out an unsecured loan to pay for the house, the Internal Revenue Service will seize the house and potentially levy the account holder’s profits.
Another reason why self employed individuals should not borrow money from their 401k plan in order to purchase real estate is because most self employed individuals have to pay taxes on any income they receive from working. The Internal Revenue Service has created a tax code that allows the account holder to write off the interest paid on mortgages. However, the tax code also imposes an annual limitation that prevents the account holder from taking advantage of this benefit. Once the account holder reaches the yearly limit, they must begin paying the tax solely from the proceeds remaining on their retirement account.
Finally, individuals who are planning on divorces may want to consider borrowing money from their 401k account in order to purchase an investment property. The divorce may prevent the account holder from being able to obtain the full amount of funds they would have needed to buy the property. The courts generally leave the division of marital assets to the spouses, but they may award each party access to a portion of the account. If the account holder does not want to disclose their divorce or financial information to the other spouse, then they may borrow from their 401k and use it for the purchase.
With a little bit of research, most people can find answers to the question, “Can I take money out of my 401k to buy an investment property?” A self employed individual may be able to borrow from their 401k funds, but most financial experts advise against this option. A better alternative may be to rollover the balance on their high interest mutual funds into a traditional IRA. Through this process, the account holder will only pay taxes on the income they receive from the investment property. In most cases, mutual funds still give the account holder choices regarding how to invest their money.