With the flexibility and convenience of 401(k) plans, many investors are considering investing part of their retirement accounts into real estate. In fact, under certain circumstances, it is possible to invest 401(k) funds directly into real estate. Fidelity is one of the major 401(k) providers that offers real estate investment options. However, there are also limitations and risks that need to be evaluated. This article provides an overview on the key considerations around investing 401(k) into real estate at Fidelity.
The basics of 401(k) real estate investment
The 401(k) plan is one of the most popular employer-sponsored retirement plans that allow employees to contribute pre-tax or after-tax funds for retirement savings. The contributions and earnings grow tax-deferred until withdrawal.
Within a 401(k), participants can select from investment options provided by their employers. While most 401(k) plans offer mainly stocks, bonds, and funds, some plans do provide access to real estate investment. The most direct way is through real estate investment trusts (REITs) that invest in various real estate assets. Some plans may also allow direct investment into rental properties.
When considering 401(k) real estate investment, investors need to evaluate:
– Investment options allowed in the plan – Each 401(k) has its own menu that outlines the available investments. Check if REITs or other real estate funds are included.
– Accountabilities and risks – While real estate in a 401(k) can diversify from stocks and bonds, there are also risks like illiquidity and concentrated exposure. Make sure you understand the responsibilities around due diligence and asset management.
– Tax implications – There could be tax penalties if certain IRS rules are violated for 401(k) real estate investment.
Overall, real estate investment within a 401(k) plan can be a viable option for retirement diversification if executed properly.
Fidelity 401(k) real estate investment choices
As one of the leading 401(k) providers, Fidelity offers a robust lineup of investment options, including access to real estate.
Within its 401(k) plans, Fidelity provides a few ways to invest in real estate:
– REIT Funds – Fidelity has 7 REIT mutual funds that focus on different real estate sectors like residential, retail, specialized, and global real estate. The most popular is Fidelity Real Estate Investment Portfolio (FRESX).
– BrokerageLink – This brokerage window allows investing 401(k) dollars into stocks, ETFs, and mutual funds beyond the core lineup. You can buy REIT stocks and other real estate funds here.
– Real Estate as Company Stock – If your employer is a real estate company, its stock may be offered as an investment choice, allowing direct access to the underlying real estate assets.
While self-directed 401(k) plans that permit direct investment in rental properties are not offered at Fidelity, the REIT funds provide liquid and diversified real estate exposure. Just remember 401(k) funds come with greater responsibilities and oversight.
Considerations for 401(k) real estate investing
While the ability to invest retirement savings in real estate seems attractive, it also comes with important considerations:
– Liquidity and diversification – Unlike directly owning property, REIT funds provide daily liquidity and access to a diverse basket of real estate. Illiquidity and concentration risks are minimized.
– Due diligence requirements – If investing in REITs or real estate securities, research is critical. The investor takes on the due diligence responsibilities.
– Prohibited transactions – Directly leveraging 401(k) funds to invest in personal real estate ventures is prohibited and penalized heavily by the IRS.
– Asset management needs – For direct ownership of rental property in the 401(k), professional administration is required adding costs.
Overall, real estate options like REITs can be appropriate for 401(k) plans. But self-directed approaches require caution to avoid violations. Consult a financial advisor when considering real estate in your 401(k).
While 401(k) plans like Fidelity allow inclusion of real estate investments like REITs, direct ownership of property has risks. Evaluating liquidity, diversification, research needs, and IRS rules is crucial.