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Forums » Private & Conventional Lending Discussion » Cashing out 401k to invest in RE

Cashing out 401k to invest in RE

86 posts by 39 users


· Louisville, Kentucky

Has anyone cashed out their 401k to try and get a greater return on their money and use the proceeds to invest in RE? I have contemplated doing this.

Multi-family Investor · South Jordan, Utah

I took a loan out against my 401k to do it...

You could also roll the 401k into a SDIRA to avoid the tax implications and invest through there. More restrictions there which may limit your potential versus just taking the tax hit and going balls to the wall, but I haven't delved too deeply into that comparison.

SFR Investor · Texas

One of our BP members @Greg B. did such a thing I believe.

Residential Landlord · Hampton Bays, New York

@Daniel Thomas If you no longer work for the Employer who the 401k was with you can roll it over to a self directed IRA and use it to invest in real estate. This is what I did. If you are still working for the employer then you can borrow the money and essentially pay yourself back with interest . this is a win win situation. If you cash out and are under 59 1/2 you will be hit with ordinary income tax and a 10% penalty , IMO too big a price to pay even if you are not in a high tax bracket.

· Louisville, Kentucky

My wife and I will both have state pensions. Not sure if I should factor that in or not.

Accountant · Lake Villa, Illinois

@Daniel Thomas,

You will be giving away too much money. You could consider rolling over part of it into a ROTH SDIRA this will allow you to pay some tax on the money and move it into an account that you will no longer be paying any tax on.

I strongly suggest in most cases the loan from the 401k. As you can deduct the interest you are paying yourself.

It would take some significant tax planning to split the tax hit. In which case you will lose a lot more than you should allow. The first step to making money is don't lose money.

If your state taxes retirement income at say 5% and you're in the federal 25% tax bracket and plus 10% early withdrawal penalty. You are looking as losing 40% of the money.

If you're in the 28% bracket the loss to taxes is 43%.

The juice isn't worth the squeeze. Consider the possibility of rolling it over.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Small_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660

Real Estate Investor · Texas

Yes I did do this in 2005 and never looked back. Cashing out is not for everyone and I would not do it if you don't have a viable plan.

Here is my argument about the 401k thing.... A 401k is a tax DEFERRED entity. You will pay income tax on the money at some point in time. The pitch was that you would be in a lower tax bracket upon retirement. Maybe, maybe not, but you will still pay income taxes on the money eventually. So the argument about paying the income taxes is a non issue for me.

The other part of the argument is the penalty, 10%. Agreed, it is a penalty, but it is surmountable.

My thing is, I put MY money into an account to defer MY income. The money is supposed to grow for decades. The actual growth will depend on your choice of investments. You may even break even over the decades or LOSE money. However, the managers that promote the investments(including fund managers) ALWAYS make money. Even in 2001, when my 401k funds lost 40% of value my fund manager was making money and never even picked the phone up to warn me that I need to make some adjustments.

The fund manager that you pay for is not looking out for your interests. Your finances are not something you can give to someone else to trust to manage. That was a tough lesson for me.

Now, while you are putting you income into the 401k for decades with the possibility that it may lose value, the 401k is NOT putting money into your pocket each month. You will not enhance your standard of living from a 401k.

What if I took that same money and put it into something that could pay me now AND pay me later? Hmm. It was a no brainer to me. I paid the penalty and income taxes and invested into income producing property.

Here's another point... Yes, my real estate investments may lose money occasionally. It could happen. However, I don't have to pay someone else to lose my money if it happens. I can take full responsibility and not have to rely on someone else to try and sell me something that will only benefit them.

Real estate investing has been a great choice for me.

Your mileage may vary.

Real Estate Investor · Texas

One more example: My wife has a 403b. We stopped contributing years ago. It has been invested in domestic and international growth equities for about 25 years now. In all of those years the value of the fund has grown a whopping 10% AND has still never put one dime in my pocket. 10% growth over 25 years, I know I can do better than that on my own. :-/

SFR Investor · Phoenix, Arizona

Much like the poster above, my wife and I cashed in old 401k's. During the stock-market crash, I transferred our old 401s into self-directed iras, when things calmed down last year, we paid the penalties & dumped the cash into down payments for two rentals. It wasn't our entire nest-egg, but the deal worked for us.

What's the actual return on your 401k in a "safe" investment? In our case, we were getting a few hundred a year on $60k in a money market account. Now we're netting that every month, and call it skill or luck, the properties have increased in value significantly.

The tax arguement doesn't wash with me, I'm 100% certain my tax rate will never go down, better to pay it now & invest in something useful that I can control.

· West, Michigan

Wow, what's plan B if things go to pot?

SFR Investor · Phoenix, Arizona

Originally posted by Ryan M.:
Wow, what's plan B if things go to pot?

Oh, you mean when "safe" "professionally managed" investments lose half their value in a 90 day period of time?

At least then I can light them on fire & get the satisfaction of watching them burn. I'm told the fenced lots would be good land to raise chickens & pigs on. When you burn a house down, you get fire trucks & sometimes a news chopper might fly over. The neighbors come over & tell you how bad they feel for you...

My Vanguard statement wasn't nearly as satisfying. Even with both accounts there, the statement was only perhaps ten pages or so - not much of a fire from those...

Real Estate Investor · Texas

@Ryan M., plan B would be the same as if your 401k was worth 60% of its value when you retire. You will be required to work more or share expenses.

The thing is you ask your question as if the 401k is guaranteed. It's not. You have no downside protection. You cannot get out if things are going bad. You can shift investments.

With RE I can decide to sell, mortgage, 1031, rent, or occupy.

· West, Michigan

Its certainly everyones own decision but when re is bought typically your name is on there if things go bad which did/is happening to a lot of landlords they come after you personally. I had lunch the other day with a former agent that had things go south for him, lost all his rentals including his house and now rents a apartment with his family.

Again, not stirring the pot but these things happen.

· North Wilkesboro, North Carolina

I have actually been thinking of doing this. I have an old 401k from a job I had 3 years ago. The 401k is in a medium risk category and after 3 years it is worth $100 less than when I left that job. So help me understand, I will pay a 10% penalty off the top, then I will pay tax on the remaining balance? Will the remaining balance be added as ordinary income or does it get hit at its own tax rate? I am self employed so I tend to do very well on taxes. Last year I was at 15% due to all of my deductions.


Real Estate Investor · Cincinnati, Ohio

Originally posted by Ryan M.:
Its certainly everyones own decision but when re is bought typically your name is on there if things go bad which did/is happening to a lot of landlords they come after you personally. I had lunch the other day with a former agent that had things go south for him, lost all his rentals including his house and now rents a apartment with his family.

Again, not stirring the pot but these things happen.

When you hear of landlords losing their portfolio, its typically because they paid way too much for properties in the first place. In our market, you can pay 35k-50k for a house that sold for >100k 5 years ago. I think you can really limit your downside risk by making educated purchase decisions.

Hard Money Lender · Tyngsboro, Massachusetts

Almost everyone who cashed in an IRA or 401k seems to have done so to invest in real estate. You can move that IRA or 401k to a self directed IRA or 401k and still invest in real estate. So you have the best of both worlds.

I personally lend out of both my 401k's and my IRA, because it is easier to manage than real estate. I don't hold real estate in either one, I hold it in individual LLC's.

@Steven Hamilton II had a good breakdown of the cost of cashing in

Small_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Hard money lending in NH and MA, and for free networking in MA,

· Louisville, Kentucky

I am doing very well with the six properties I have. I thought since I will have a pension it might be best to cash out the 401k and pay off all the mortgages and then pay cash for a house every two to three years with the rents from the properties. Seems like this may give a better income in retirement then the 401k would. Any thoughts?

Residential Landlord · Hampton Bays, New York

@Ann Bellamy has hit the nail on the head why would you pay a large tax on cashing out a 401k when you can invest by rolling over to a self directed IRA. The tax you would pay would then remain available to invest . No one knows what future taxes will Look Like but you can control what you distribute until age 70 1/2 when you must start taking modest distributions which will be taxed as ordinary income.

Residential Landlord · Hampton Bays, New York

@Daniel Thomas If you can roll over the 401k you could purchase real estate now in a self directed IRA and buy property while it has substantially declined. You could also use the net income to buy additional properties as they are earned. If you are still working you can accomplish similar results by borrowing from you 401k and using that to invest in real estate. IMO these are much better alternatives to cashing out and taking a substantial loss before you even start to make money.

SFR Investor · Phoenix, Arizona

Originally posted by Michael Lauther:
Ann Bellamy has hit the nail on the head why would you pay a large tax on cashing out a 401k when you can invest by rolling over to a self directed IRA. The tax you would pay would then remain available to invest . No one knows what future taxes will Look Like but you can control what you distribute until age 70 1/2 when you must start taking modest distributions which will be taxed as ordinary income.

I question the wisdom of "hoping" your taxes will be lower in the future. You *are* going to pay taxes on any money in your 401k or IRA plan, or you'll be dead and it won't matter to you.

Those are your only choices.

I hate to see so many people stuck in a "loop", afraid of paying taxes, even on fairly insignificant amounts of money, when there are better options out there.

Every one is different, every situation is different, but there are deals that are *worth* doing, even if you have to pay some taxes.

My first deal with former IRA funds was a $70k property, purchased with about $20k down. It rents for $950 per month. After less than a year of ownership, Zillow says I could get $95k for the property, but the most recent comp was a few days ago @ $120k. Paying the taxes made that deal *possible* - I could not have done the deal without the IRA money.

It was an extraordinary deal, in an extraordinary time, and I probably couldn't do another like it today, without months of work, and a pile of luck. But I don't need to score like that every day. Just a few deals like that can make retirement possible. If you've got more time than money, sometimes you have to break the "rules".

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