Should You Ever Use Retirement Funds to Buy a House?

A 401(k) and individual retirement account are excellent ways to save for retirement because contributions and gains are tax advantaged. While many individuals use these accounts to invest in stocks and bonds, under the right circumstances, you can also invest in real estate.

See: 10 Things Boomers Should Consider Selling in Retirement
Find: 3 Things You Must Do When Your Savings Reach $50,000

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Invest in REITs

Real estate investments trusts pool money from investors to purchase and operate investment properties. The types of investments REITs make range from multifamily residential housing to warehouses, hotels, office buildings and shopping malls.

Some REITs trade publicly on stock exchanges, which means you can invest in a REIT through an IRA — and might be able to invest through your 401(k). One benefit of investing this way is that the dividends you earn grow tax-deferred.

Read: How Much Monthly Income Could You Get From a $100,000 Annuity?

Invest in a Self-Directed 401(k) or IRA

Whereas the typical 401(k) is sponsored by an employer, a self-directed 401(k) puts control into the account holder’s hands and allows for a wider range of investments, including alternative assets like real estate. A self-directed IRA can also invest in real estate.

Only a small number of employers offer self-directed 401(k)s, but solo 401(k)s for self-employed individuals with no full-time employees are always self-directed. With either type — or with a self-directed IRA — a custodian holds the assets on your behalf.

You do have to follow some rules, though. The purchase can’t benefit family members, for example, and the income you invest must come from a business activity other than real estate investing. Otherwise, you can use your funds to purchase real estate now and enjoy the gains in the future, after you retire.

Borrow Against Your 401(k)

Many 401(k) plans allow you to borrow up to $50,000 or half of your account balance, whichever is less, without penalty. You could, conceivably, invest the borrowed funds in real estate.

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That said, it’s a risky way to invest. You must repay the loan within five years — or almost immediately if you separate from the company. Otherwise, you’ll owe a 10% penalty if you’re younger than age 59.5, plus income tax on the distribution. In addition, you could miss out on growth if the real estate investment generates lower returns than the other investments in your account.

Make a Hardship Withdrawal From Your IRA

Special hardship provisions allow you to withdraw funds from your IRA without suffering the 10% early withdrawal penalty if you’re under the age of 59.5.

Qualified homebuyers can withdraw as much as $10,000 for a first home purchase. This is true for both traditional IRAs and Roth IRAs, but with Roth IRAs you need to have held the account for at least five years.

The hardship penalty exception does not apply to 401(k)s.

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