A 401(k) is a retirement savings plan sponsored by an employer. It allows employees to contribute a portion of their salary to individual accounts, and the money in these accounts can be invested in a variety of options, such as stocks, bonds, mutual funds, and exchange-traded funds. Many employers offer matching contributions as an added incentive for employees to participate in the plan. Contributions to a 401(k) are made on a pre-tax basis, which means that the money you contribute is deducted from your taxable income for the year. This can help lower your tax bill in the current year and can also lead to tax-deferred growth on the money in your account. Some employers also offer a Roth 401(k) option, which allows employees to contribute after-tax dollars to the plan. The money in a Roth 401(k) grows tax-free and can be withdrawn tax-free in retirement.
There are a few ways you can use your 401(k) to fund your real estate goals:
Borrow from your 401(k): Many 401(k) plans allow you to borrow money from your account for any reason. You can typically borrow up to 50% of your account balance, up to a maximum of $50,000. The interest rate on the loan is usually based on the prime rate, and you will have to pay the loan back within five years, although there may be longer repayment periods for loans used to purchase a primary residence.
Roll over your 401(k) to a self-directed IRA: If you leave your employer or change jobs, you can roll over your 401(k) into a self-directed IRA. A self-directed IRA allows you to invest in a wider range of assets, including real estate, and can give you more control over your investments.
Use a 401(k) to buy a property directly: Some 401(k) plans allow you to use your account to purchase property directly. This option may be more limited and may not be available in all plans.
Before pursuing any of these options, it's important to carefully consider the potential risks and benefits. It's also a good idea to consult with a financial advisor or tax professional to understand the tax implications and to ensure that you are making the best decision for your specific situation.