Employer-sponsored 401(k)s offer a great way to save for retirement, but they’re structured in a way that limits your ability to take control of your investments.

That’s especially true if you’re looking at real estate to round out your portfolio.

The good news?  You can easily convert a 401(k) to real estate investments by opening a self-directed IRA and using a rollover.

We’ll explore how easy it is to convert your 401(k) to a real estate investment using our experience with transfers and rollovers, which allow investors to start putting their money to work the way they want to.

What Is a Self-Directed IRA?

A self-directed IRA (SDIRA) is an individual retirement account that provides the tax benefits of a standard IRA with the freedom to invest in a wide range of alternative assets, such as real estate, mortgage notes, and private equity.

When you open an SDIRA, a custodian holds your assets and oversees the administration side of your account. However, unlike a standard IRA, you’re in charge of your investment decisions and the required due diligence.

That means you can invest your money in real estate in places as diverse as New York City, Austin, or Denver as you see fit, as long as they meet IRA guidelines. In the case of real estate, this autonomy makes it easier to establish passive income by taking advantage of real estate opportunities as they are available.



How to Rollover a 401(k) to a Self-Directed IRA

You have contributed to your 401(k) for quite some time and have enough money to invest in real estate, but there’s one problem: IRS guidelines prevent you from investing 401(k) funds directly into real estate.

Fortunately, you can move your 401(k) funds to a new or existing SDIRA using a process known as a “rollover.” Rollovers are simple and can be completed in four steps.

Step 1: Find a custodian.

An SDIRA custodian is a financial entity that holds and manages your funds. A custodian acts as a third party between you and the investment opportunity, but they will not make investment decisions or provide advice.

While banks and brokers can act as SDIRA custodians, most mainstream entities don’t provide true SDIRA services. Instead, you must work with an IRS-approved entity, such as Horizon Trust.

As you look for and review custodians, keep these factors in mind:

  • Expertise. If you’re investing in real estate, you must choose a custodian with experience working with that type of asset. This ensures that the custodian you choose fully understands the federal requirements and best practices associated with real estate investment transactions.
  • Speed and volume. Today’s real estate market is fast-paced, and stalled paperwork or unreasonable transaction limits can cause you to miss an opportunity. So before you commit to a custodian, find out how quickly they typically process transactions and what, if any, limits exist.
  • Fees. All custodians charge fees, but how and when varies. Ask for a fee schedule to determine your investment strategy. It’s also helpful to inquire about miscellaneous fees, such as when investing or holding real estate.
  • Customer service. IRAs represent long-term investment decisions. The same can be true of real estate. Before committing to a custodian, make sure you’re pleased with their customer service and the attention and care they provide during your initial inquiry. You can also speak with friends, relatives, colleagues, or other real estate investors for recommendations.

Step 2: Complete a Rollover

There are multiple ways to fund your IRA, but if you’re using 401(k) funds, then a rollover is your best option. When completing a rollover, you can choose from a direct rollover or a 60-day rollover.

Direct rollovers move funds directly from your 401(k) holder to your chosen custodian.

For instance, if you have a 401(k) with Bank A and want to use it to fund an SDIRA held by Custodian B, you would simply complete the necessary paperwork (often online) and the funds would go directly from Bank A to Custodian B. In this scenario, you would never take custody of the funds.

60-day rollovers, also known as indirect rollovers, require you to take custody of the funds.

Instead of rolling funds from Bank A to Custodian B, for example,  you would take possession of the funds from Bank A, either by check or wire transfer. Then you would have 60 days to move the funds from your possession to Custodian B. If you fail to complete that transaction, the IRS considers it a distribution, and you may face taxes and penalties.

Both choices are relatively simple, and it’s up to the investor to determine what they feel is the easier option given their circumstances.

Step 3: Fund Your Account

A rollover isn’t the only way to fund your account. You can also fund it by moving funds from an existing IRA to your new SDIRA in a process known as a “transfer.”

If you choose a transfer, you are required to move funds between accounts. For instance, if you have a Roth IRA, you must transfer funds to a Roth SDIRA.

You can also fund your account using a checking or savings account, but these transactions are considered contributions. The IRS limits the amount of money you can contribute to your IRA account, and the 2023 contribution limit is $6,500 ($7,500 if you’re over 50).

If you contribute more than the IRS limit, you’ll be penalized until you remove the excess contribution. As such, this funding option may be suitable for ongoing, incremental contributions but can’t accommodate a large real estate purchase.

 Step 4: Make a Real Estate Purchase

Once you fund your account, you can purchase real estate in the name of your IRA. There are several ways to buy real estate with an IRA, including:

  • Direct purchase: If your SDIRA holds enough funds to purchase the property outright, then you can complete a direct purchase. This is the simplest way to use your IRA to purchase real estate.
  • LLCs: When you invest in any asset using IRA funds, the investment must first pass through the custodian. However, you can avoid this step by establishing an LLC and naming the LLC as a member of the IRA. This gives you “checkbook control,” meaning you can complete transactions directly from your IRA-LLC, like purchasing property or paying a property manager, instead of going through the custodian.
  • Partnerships and Syndications: If you don’t have enough money in your account to purchase the property in question, you can partner with other IRAs. In this scenario, your ownership and returns depend on how much money you spend on the transaction.

Like partnerships, syndication allows you to pool money together with other investors. However, syndications are typically used to purchase large or expansive property, such as a multi-million dollar commercial real estate project.

  • Non-recourse loans: If other purchasing options are out of reach, you can consider a non-recourse loan. Under this type of lending agreement, you would borrow from (and pay back) a lender, much like a mortgage. If you fail to make payments, the only “recourse” the lender has is to foreclose on the property. Non-recourse loans can be risky for lenders and, thus, may be difficult to qualify for.
  • REITs: If you lack the capital to invest in real estate directly, or you don’t want to finance or manage a property on your own, you can invest in a real estate investment trust or REIT.

A REIT invests in and manages real estate properties, including apartment complexes, commercial buildings, hotels, infrastructure, etc. Investing in a REIT is similar to investing in a mutual fund, but it is specific to real estate.

Benefits of Investing in Real Estate for Retirement

Investing your retirement savings in real estate has several benefits worth considering:

  • Leverages existing funds to raise capital. Investing in real estate allows you to leverage existing retirement funds to increase wealth faster than is typically possible through other assets, such as stocks and bonds. As such, you can raise capital faster and reinvest in similar or larger projects to further grow your account.
  • Establishes passive income. If you purchase and subsequently rent out a property, all income from the property goes directly to your IRA, allowing you to create a steady stream of income that will gain interest over the years. This is an easy way to collect passive income and grow your retirement fund with little to no effort.

Keep in mind that you or any disqualified individuals cannot live in or directly benefit from the property. In other words, you couldn’t purchase property and let your children live in it or use your son’s construction property to complete renovation.

  • Builds equity. As long as the market price remains above what you paid for the property, you build equity. Or, if you used a non-recourse loan to purchase the property, your equity will grow with each payment.

When it’s time to retire, you can sell the property and the equity gained will go directly into your account.

  • Protects against inflation. Real estate is not directly tied to the market and is often considered one of the most inflation and recession-proof assets available to investors. As such, it represents a great way to diversify your portfolio, particularly if other assets you hold are sensitive to market shifts.

Purchasing real estate with your retirement account can be a great way to save for retirement. Unfortunately, traditional retirement plans like IRAs and 401(K)s don’t allow you to invest in real estate directly.

Investors generally have two options; either switch to a self-directed 401(k) or convert their 401(k) to a real estate investment via an SDIRA rollover. In our experience, the latter option offers significant tax benefits and is highly favored by investors.

If you’re considering conducting a transfer or rollover to convert your 401(k) to an SDIRA, talk to one of the experts at Horizon Trust. Our concierge team can help answer any questions and start the process immediately so that you can begin investing in no time.


Can you purchase real estate directly with a 401(k)?

You cannot hold real estate in your 401(k). If your goal is to invest in real estate, the best option is to roll over your 401(k) funds to an SDIRA. Doing so allows you to hold the real estate in your retirement account without penalty or taxes.

If your goal is to purchase a home for personal use, you can take a loan from your 401(k), but you will need to pay it back. You can also make a withdrawal from your account, but that can leave you vulnerable to taxes and penalties.

How do I roll over my 401(k) and avoid taxes?

The best way to avoid taxes when rolling over a 401(k) is to choose a direct rollover. This type of rollover moves funds directly from the 401(k) to the IRA account. If you’d prefer a 60-day or indirect rollover, you must deposit the funds into the IRA account within 60 days of withdrawing them from the 401(k) account.

Does rolling over a 401(k) to an IRA count as a contribution?

No, rollovers are not considered contributions and therefore do not count toward the IRS-set contribution limits.