Most Americans state that building wealth for the future is a major career goal. This ethos of “working to live” instead of “living to work” prompts many folks to start setting capital aside for a comfortable retirement. While not many want to work forever, most people do look forward to living well, especially in their golden years. That’s why this blog discusses using a 401(k) for investment property.

It should come as no surprise that investment properties offer enormous potential value to investors because they add another avenue for stable returns to their portfolios. What may surprise you is that eligible investors may be able to invest in real property by using funds currently held in a 401(k).

If you’re looking for ways to diversify your portfolio, I’ve got the details you need to know to use money in a 401(k) to purchase real estate investments.

401(k)s Explained

For decades, 401(k)s have replaced traditional pensions as the most common financial vehicle for retirement savings. Recent factors like market volatility, inflation, withdrawal limits, and accompanying taxes, however, have started raising questions about whether investments held in a 401(k) alone can sustain a suitable quality of retired life.

Definition

Typically employer-sponsored, 401(k)s are tax-advantaged retirement plans through which companies often match a certain percentage of employee contributions. Employees can choose a flat dollar amount or percentage of their gross salary to contribute from every paycheck. All contributions are tax-deductible, but withdrawals are subject to taxes.

This readily accessible option gives even the least financially savvy individual an opportunity to invest in funds with limited hands-on involvement. With a standard 401(k), you can just set it and forget it!

Limitations

You might notice some drawbacks in the details, however, that could make a 401(k) less enticing as a singular retirement option.

Chief among them is the limit of options you have over how to invest your money after it’s contributed. The capital in your 401(k) is essentially locked in place — usually 401(k) participants must select from a pre-set portfolio of stocks, bonds, and mutual funds — until you make a withdrawal. That means even if you have hundreds of thousands of dollars invested, you have little choice about which individual funds your money goes into.

In addition, it could take years before you are vested in your employer’s contributions. Though the length of time varies with individual plans, most employees are fully vested within either 3 or 6 years, maximum. You may risk forfeiting any employer contributions if you leave a company before you’re vested. If this occurs, it could significantly impact your account balances and funds invested to date.

Moreover, as market forces continue to shift in extremes and inflation reaches decades-high levels, your current 401(k) investments may simply not be enough to provide the life you’ve imagined when it’s time to retire and reap the rewards of your hard work.

In short, while 401(k)s do allow you to contribute easily to a retirement savings account without worrying about closely managing the funds, they do have some shortcomings, which can include:

• Limited options for investment once the funds have been contributed.
• Possible delay of several years before you become vested.
• IRS limits on yearly contributions.
• Tax penalties upon early withdrawal. 
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There are ways to transfer your money out of its current 401(k) vehicle to explore more options to invest your money. It all starts with what is known as a 401(k) rollover.

Rolling Over a 401(k) 

A 401(k) rollover involves a direct transfer of the funds from your current 401(k) plan to an individual retirement account (IRA). There are some intricacies here that we recommend you speak to your investment advisor about. If a rollover is right for you, funds placed in a self-directed IRA may be eligible for various alternative investments, including real estate.

The table below lists some of the key differences between a 401(k) and a self-directed IRA.

The key factor when comparing 401(k)s with self-directed IRAs regarding investments is that you have a lot more options with a self-directed IRA because you generally have access and can control what you do with the funds.

This article and the grid above contain only summary information about 401(k)s and self-directed IRAs. Be sure to talk to your financial advisor and your tax professional to ensure you understand these investment vehicles, rules, and the limitations that may apply.

How to Use 401(k) Assets for an Investment Property

Earlier in this article, we mentioned real estate investing options, but we had to save discussing the nuts and bolts until after the 401(k)-vs.-self-directed-IRA explanation. That’s because while you generally will not have the ability to invest 401(k) funds for direct real estate investing, you can gain this ability by using a self-directed IRA.

So, you’ve set aside funds from your 401(k) and rolled them into a self-directed IRA. Now your money isn’t restricted to traditional investments like bonds or stocks and—subject to certain limitations—you can fund a variety of alternative investments, like real estate.

But what are the mechanics of this process, you ask? While the process is a bit involved, we can distill it into a handful of main steps, listed below.

1. Open your self-directed IRA.
2. Roll your funds from your 401(k) into the IRA.
3. Locate your potential investment property.
4. Make an Earnest Money Deposit.
5. Prepare for the escrow process with the title company.
6. Close the purchase of the property.
7. Begin managing the property.
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Now that you have the basic dance steps, there are a few guidelines and caveats you should know about before beginning this process:

• The property must be used solely as an investment property. It cannot be used as a second home, an office for your business, or a home for family members.
• Any revenue generated from the property, like rental income, must be declared as taxable income.
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Armed with all this knowledge, your next step is to use it to start diversifying your investment portfolio. It’s worth noting that taking on an investment property is a huge responsibility, especially for those who are new to the whole real estate investment strategy. As the property manager, you’ll be responsible not only for ensuring the tenants are happy and that the property satisfies legal requirements, but you’ll also manage the taxes and fees that come with your new source of income.

If it sounds like you’re trading away the convenience of “setting and forgetting” your automatic 401(k) contributions, that’s not necessarily the case.

For example, instead of managing a property directly, you could put your money into a real estate investment that’s managed by another party. This allows you to enjoy the benefits of real estate investing without the extra responsibilities of property management. You could give Canyon View Capital a ring to find out what kinds of options we have that will accommodate your self-directed IRA. All it takes is a phone call.

Canyon View Capital Makes Real Estate Investing Simpler

Here at Canyon View Capital, real estate investing is our bread and butter. CVC principals have over 40 years of experience, and now our team manages over $1 billion (aggregated) in real estate properties located across middle America. Our offerings have similarities to other real estate investments but without the burden of property management.

Whether you’re new to real estate investing or an old pro, the CVC team is ready to make real estate investing as easy for you as possible. We can also leverage a depth of pooled knowledge from principals with a broad scope of professional experience.

A common concern for many Americans progressing through their careers is how to prepare for the transition from actively working to “retired” — emotionally and financially. If you’re one of the millions of people with an employer-sponsored retirement plan, you’re probably wondering if you’ve saved enough — and may be curious about the returns you’re getting on those savings.

A recent Investment Company Institute report on the $37 trillion US retirement market indicates 401(k)s make up just over $7 trillion, or roughly one-fifth of the total assets. The rest includes individual retirement accounts (IRAs), pensions, and annuities for private and public sectors.

Aside from increasingly rare pension funds, 401(k)s considered a “simpler” approach to investing because contributions come out of your paycheck automatically. Such regular deposits in investment options can offer many people a sense of security — especially when compared to other savings vehicles, like certificates of deposit (CDs), bonds, or keeping it under your mattress. While recent market downturns, higher fees, and periods of recession could deflate the perceived stability of 401(k)s, a bigger issue is how much flexibility such savings allow.

But there is another way—if you have money in a 401(k), that doesn’t necessarily mean it’s completely tied up! If you’re reading this post, you’ve probably got a solid start on your retirement savings, and now you want it to work for you. If you’re looking for ways to diversify your investment portfolio with alternative options like real estate, this discussion on 401(k) real estate investment rules can help you get started. Use the links below to jump ahead to different sections.

Why Investing for the Future Matters

Almost everybody wants to enjoy a relaxing, stable retirement — barring a few special exceptions. When it’s time to move on to the chapter beyond your career, how much you manage to save until that point can strongly influence the quality of your retirement.

Your dreams don’t end just because you retire. When you’ve successfully invested in your future, you want the ability to realize those aspirations, along with new goals developed along the way. More importantly, you want to maintain financial independence long after stepping away from an active career. For a lot of people, such independence comes from a retirement fund, the most commonbeing 401(k)s and IRAs.

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401(k)s Explained

401(k)s are defined contribution plans typically used by US employers as retirement funds. These funds offer tax advantages for employees, who can designate a pre-tax amount of each paycheck for deposit. In some cases, employers can opt to match employee contributions.

As an example, if an employee elects to deposit 5% of every paycheck into a 401(k), their employer can choose to match that dollar amount. If an employee’s contribution amounts to $500 per paycheck and their employer opts to match it, another $500 is deposited in the employee’s retirement account.

Depending on the plan, it can take some time before you are fully vested in your employer’s contributions, meaning that you own them outright. If you leave a job before you’re vested, you could forfeit some or all matching contributions to your 401(k).

Deposited funds are typically invested in a number of different savings vehicles that, together, make up the entire 401(k). With some 401(k) funds, you can choose how to allocate your savings from a list of stocks, bonds, mutual funds, and CDs.

Because traditional pre-tax retirement contributions are deducted from an employee’s gross income, the deposited amount reduces taxable income. And, as no taxes are due until the money is withdrawn, these savings can grow tax-deferred.

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ROTH 401(k)s

The ROTH 401(k) is another type of retirement fund, but with one key difference from traditional models: this species of savings uses post-tax deductions. The deposits are deducted from net income (unlike traditional 401(k)s), but there are no taxes due for withdrawals after age 59 ½.

Regardless of the type, all 401(k)s have limits on the maximum amount of annual contributions (for 2023, the max amount is $22,500).

401(k) Real Estate Investment Rules You Should Know

Now that you have a better understanding of 401(k)s, you’ll likely want more information about managing the funds you’ve contributed. There are some individual plan guidelines that determine what you can and can’t do with the money once it leaves your paycheck and is deposited in retirement savings. There are also a few 401(k) real estate investment rules that must be followed when moving that money into real estate.

Often, when you start contributing to a 401(k), you’ll be allowed to choose how the money is invested or if it will just sit in a money market account. In general, 401(k)s tend to have rigid guidelines on how funds are invested. Some of those rules specify:

1. You cannot invest in individual companies.
2. You may select one or more mutual funds or exchange-traded funds (ETFs) that invest in sectors or in a variety of companies.
3. You cannot pull money out of a 401(k) before age 59 ½ for traditional 401(k)s without meeting one of the IRS exceptions — or from ROTH 401(k)s before age 59 ½ unless you become disabled  — without suffering a penalty.
4. When you leave one job for another, there is a 60-day window wherein the IRS allows you to move your money from a 401(k) into an IRA.
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The last rule is crucial to giving you greater investing flexibility with your 401(k) funds. That’s because unless you want to pay a steep 10% fee on funds you withdraw (unless you meet an exception), it’s the only leeway the IRS gives you.

IRAs are another kind of pre-tax retirement savings account but they differ from 401(k)s in that they have no employer sponsors. As indicated by the name, “individual account,” investors have more agency in deciding where the money goes.

If, for instance, you wanted to take money out of your IRA and invest it in a wider universe of investment options, including real estate, you can do so! IRAs do come with a few caveats, compared to 401(k)s. They have lower contribution limits and are not eligible for matching employer contributions.

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Despite some limitations, IRAs are a valuable tool to have in your retirement planning toolkit because you can invest money from an IRA directly into real estate. Conversely, a crucial 401(k) real estate investment rule to remember is that you cannot invest money from a 401(k) directly into real estate.

Instead, you must roll your 401(k) funds over into a self-directed IRA. Using the 60-day window allotted by the IRS to move money from a 401(k) to an IRA is called a rollover. This strategy can be used to free up money that may otherwise be “stuck” in the more restricted investment opportunities that 401(k)s offer.

There is also a standard process that you must follow.

By taking advantage of a self-directed IRA, you can explore a wider range of investment options like real estate that may not be available through your 401(k). This can be especially useful if you’re concerned that external factors may impact your 401(k) and want to try and further diversify your portfolio to better protect your retirement savings.

If the thought of mixing up your investments alternatives like real estate options piques your interest, you might be wondering about the next steps you can take. That’s where Canyon View Capital comes in. A phone call is all it takes for us to provide you with expert assistance.

Canyon View Capital Offers Options for Real Estate Investment

Congratulations, you’ve taken the first step toward a clearer financial future! Now you’ll want to partner with experts that are not only focused on bringing investors like you financial strategies that could be a good fit for your investment strategy. 

At CVC, we eat, sleep, and breathe real estate investing. With decades of experience under our belt and investments throughout the Midwest and Midsouth, we’re here to offer you funds that make your money work for you without worrying about getting caught up in the confusing details.

When it comes to real estate investing, navigating a path to financial growth requires a broad understanding of the diverse tools and strategies at your disposal. Among these, the 1031 exchange stands out as a game-changing tax deferment strategy that could amplify your profitability when selling an investment property.

Imagine this: you’re considering selling an investment property, but the prospect of surrendering a substantial portion—potentially over 30%—to capital gains taxes is understandably troubling. Thankfully, investment strategies like 1031 exchanges and other alternatives can help you retain those profits and direct them into other lucrative investment avenues.

In this article, we will examine how the benefits of a 1031 exchange compare with alternative investment strategies. This will give you a broad comparison to help you make informed decisions that support your investment goals.

What Is a 1031 Exchange?

In the dynamic world of real estate investing, shrewd investors are turning their attention to a strategic gem nestled within section 1031 of the Internal Revenue Code (IRC): the 1031 exchange. For those less familiar with the concept, 1031 exchanges allow investors to delay paying capital gains taxes and unlock new financial possibilities.

At its core, a 1031 exchange empowers investors to sidestep the burden of capital gains taxes by reinvesting the proceeds into “like-kind” property. This means exchanging one property for another—of equal or greater value and intended for investment purposes—without triggering an immediate tax liability. The implications of this strategy are far-reaching, with the power to open doors to new financial advantages and opportunities.

Sound good? That’s because it is! While the long-term benefits of a 1031 exchange are undeniable, the “catch” is that to be valid, these transactions require strict adherence to Internal Revenue Service (IRS) guidelines and regulations, as listed below.

The Best 1031 Exchange Benefits

Ok, so now you know the definition of a 1031 exchange, but what about some actual 1031 exchange benefits? While the overall goal of a 1031 exchange is to defer capital gains taxes, this kind of transaction offers many additional benefits. Understanding the details that make up these advantages—like those listed below—is crucial for knowing whether a 1031 exchange is a good fit for your investment strategy.

• Tax Deferral. The most obvious 1031 exchange benefit is the ability to defer costly capital gains taxes. Section 1031 of the IRC makes this possible by reinvesting the proceeds from the sale of an investment property into a “like-kind” property, which allows investors to keep more profits in their pockets.
• Increased Buying Power. Deferring capital gains taxes gives investors more available capital for reinvestment. This increased buying power enables them to acquire higher-value properties, which could, in turn, facilitate portfolio growth.
• Portfolio Diversification. An increase in buying power also supports portfolio diversification. Adding properties from different markets and asset classes can help to spread a portfolio’s risk and provide potential access to markets with higher rents.
• Wealth Accumulation. Larger, more diverse investment properties may allow investors the potential to generate more income and build net worth faster. Leaning into this kind of “snowball effect” is but one way to grow wealth.
• Enhanced Flexibility. As their wealth accumulates, an increase in financial agility allows investors to respond swiftly to changing market conditions and investment goals. This kind of adaptability empowers them to reconfigure real estate investment portfolios, seize emerging market opportunities, or consolidate properties to align with changing investment strategies.
• Potential Cash Flow Enhancement. With underperforming properties, 1031 exchanges enable investors to trade them for properties with better income-generating potential. This, in turn, could lead to increased rental income and improved cash flow.
• Geographic Expansion. Participating in a 1031 exchange could encourage investors to explore real estate opportunities in different regions. They can exchange properties from one state, like California, to another that may have market dynamics, economic growth, stability, or other specific incentives offered by different geographic locations.
• Risk Mitigation. Diversifying real estate investments via a 1031 exchange allows investors to spread their risk across different types of properties, locations, or market segments. This strategy offers their portfolios better protection than the potential forces of a single property or market.
  
  

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How Do 1031 Exchange Alternatives Stack Up?

1. Opportunity Zones.
   Opportunity Zones, created under the Tax Cuts and Jobs Act to spur job creation and economic growth, present unique tax-advantaged investment opportunities in economically distressed areas. Such zones incentivize investors to support revitalization efforts with funds allocated from previous investments and offer the potential to defer or (in some cases) eliminate capital gains taxes on investment profits.The downside is that Opportunity Zones are limited to pre-designated areas within a city/county, which could require time-consuming research into the area. They can also leave investors vulnerable to potential market uncertainties in economically distressed areas.

2. Delaware Statutory Trusts (DSTs).
   DSTs offer a collaborative approach to real estate investing, allowing multiple investors to pool their funds and collectively invest in larger commercial properties. This provides individual investors access to properties they may not have been able to afford on their own, while also enjoying the potential tax advantages of this investment structure.However, the collaborative nature of DSTs limits individual control over property decisions and a required long-term commitment to the trusts typically limits liquidity.

3. Installment Sales.
   Opting for an installment sale allows property owners to sell a property in multiple payments over time, rather than receiving a lump sum upfront. This approach spreads out the tax liability over an extended period, potentially reducing the overall amount of taxes owed and providing greater flexibility for managing tax obligations.The main drawback to installment sales is that they rely on the buyer’s ability to make installment payments, which can expose investors to risk should a buyer default.

4. Paying Capital Gains Taxes.
   While not as appealing to some investors, simply paying capital gains taxes on the sale of property remains a viable alternative. This option may suit investors who want to fully cash out of an investment and transition into other opportunities without the complexities or restrictions of alternative strategies.Although paying your capital gains taxes is always an option, it eliminates the ability to take advantage of any potential tax benefits or deferral strategies.

5. 721 Exchanges.
   A 721 exchange allows property owners to exchange property for shares in an umbrella partnership real estate investment trust, or UPREIT. This allows investors to diversify their investments while enjoying potential tax benefits associated with the structure of the partnership.With 721 exchanges, however, the potential remains for investors to lose control over their contributed property, and said contribution is integral to obtaining UPREIT shares.
   
   

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Each of these alternatives to 1031 exchanges offers potential advantages, disadvantages, and considerations. Understanding the intricacies of each and how they compare to 1031 exchanges is crucial to making informed decisions that align with the scope of your real estate investment objectives.

Navigating the world of investment property sales requires careful consideration of all available options. Although 1031 exchange tax benefits may seem like the clear winner, it’s essential to explore alternative strategies that align with your specific needs. The complexity of 1031 exchanges and other strategies may seem daunting, making it crucial for even experienced investors to seek professional guidance. That’s where Canyon View Capital comes in.

CVC Makes Real Estate Investing Make Sense

At Canyon View Capital, we understand the intricacies of real estate investment, 1031 exchange tax benefits, and the importance of tailored solutions. Our team of seasoned professionals is dedicated to helping you make informed decisions that align with your investment objectives. With 1031 exchanges, we provide the expertise and personalized guidance to navigate the path toward your financial goals.

But we don’t stop there. At CVC, we strive to help our investors understand the language of investing by sharing the knowledge and experience that we’ve gathered over four decades of owning and managing real estate now valued at over $1 billion1.

Don’t let the complexity of 1031 exchanges deter you from making the best decision for your investments. Contact Canyon View Capital today to unlock the full potential of your portfolio and ensure your 1031 exchange process is as seamless as possible.