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How to Use Your Retirement Funds for Real Estate

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By : Kris Koonar    99 or more times read
Submitted 2012-10-16 09:10:40
You can use the tax-deferred money of your retirement plan to take advantage of the investment opportunities in real estate. Thus, you have the chance to tuck property into the retirement account, but you need to be very careful, as a small mistake can turn into a major tax disaster. In the past few years there has been a general downward trend in the stock market. Hence, despite the recent rebound of stocks, millions of almost retired or retired people have been forced to extend their working years in order to maintain a minimum living standard. But there has been one asset whose value has increased a lot during this period - real estate.

You can use your 401-(K) funds for diversifying your portfolio mix into real property.

The 401 (K) plan:

It is essential to understand the basic features of a 401-(K) program. It is a sub-section of the Profit Sharing Plan Section of the Internal Revenue Code. 401 (K) allows employee deferrals on a pre-tax basis. If you are an employer, you can make this plan available to your employees through the adoption of an acceptable format for such a plan.

There are limitations to the contribution that employees can make. If you adopt such a plan, then as an employer it can permit you to match the contributions of the employees, and to make profit sharing contributions at your discretion. As an individual employee you can contribute up to 20% of annual compensation to a maximum amount of 9,500 dollars annually. An employer can make matching contributions of up to 8% of the total compensation for every employee. There are chances of profit sharing contributions also being made and, under certain circumstances, you can even get a combined package of 401(K).

Employers can design the plans features and provide alternative investments for themselves and their employees. Employees are allowed to operate the investments and deferrals that are established by the employers. If you feel that there are some features that are not available to you as an employee, then you need to discuss the issue with your employer to determine whether those features can be adopted by your 401 (K) plan.

Use of 401-(K) plan for notes and real estate:

If you are wondering about how the funds in your 401-(K) plan can be used for transactions in real estate, then you need not worry. There are simple rules to do it, once you have found out that the funds of 401-(K) plan can be helpful in real self-direction, and the trustee of the plan also permits such transactions. The rules are:

. Assets, which are not prohibited, can be purchased into your plan. Real estate is not prohibited.
. You may not deal with your family members or yourself, other than your siblings.
. The transactions that take place should be at arms length.

This means that mortgages can be purchased with the plan assets. Hence, you can purchase real property in your plan for purposes related to income. The first step is to find the note or property. These plans are supposed to be self-directed in which you take all the risks and also enjoy all the benefits. The second step is to ask the plan administrator to get in contact with the plan trustee for purchasing the selected asset for your benefit in your plan. All this will be done through written documents. Third, the security interest in the asset you will be purchasing is perfected for the benefit of your plan account. Some people buy distressed properties and fix them up and then sell. Others buy discounted notes. Some buy income streams. There are as many options as one can think of, provided you follow the rules.
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