Using my 403K to invest

8 Replies

Hello, I would like some advice. I have a friend who wants to sell me his current rental. I do not have the 20% down payment the mortgage company is requiring. This amounts to $21,600. I am thinking of of using the entirety of my 403K (it is the teacher's equivalent to a 401K, sort of) and about 3,000 of my 10,000 emergency fund savings to pay for it. I did a rough estimate and I believe the cash flow will be somewhere in the ball park of $115, using the 50% rule. The home is valued at 108,000. Is it generally considered a bad idea to use retirement funds in order to bank roll your first investment? Thanks in advance. 

Originally posted by @Alfredo Chavira :

Hello, I would like some advice. I have a friend who wants to sell me his current rental. I do not have the 20% down payment the mortgage company is requiring. This amounts to $21,600. I am thinking of of using the entirety of my 403K (it is the teacher's equivalent to a 401K, sort of) and about 3,000 of my 10,000 emergency fund savings to pay for it. I did a rough estimate and I believe the cash flow will be somewhere in the ball park of $115, using the 50% rule. The home is valued at 108,000. Is it generally considered a bad idea to use retirement funds in order to bank roll your first investment? Thanks in advance. 

 This is not my area of expertise by any means... but wouldn't you pay penalties to pull the money out?  Is the return you would get with the real estate greater than the return the portfolio is currently getting?  Can you roll it into a SDIRA and avoid the penalties and use that to invest?

Instead of pulling money out of your 401k, why not take a loan out against the value of your 401k?  That means you don't have any penalties, and once you pay back the loan, your 401k remains intact.  I'd recommend talking to a good lender about how to do this (as they should be familiar with the concept) and if it makes sense for you.  

@Alfredo Chavira There are questions that need to be answered before giving you recommendations. Are you still actively contributing to your 403B? (that's the real IRS code section by the way for teachers and public employees). If you are then you can't touch that money until you're 59 1/2 unless you take a loan out. If you take a loan out you'll have to pay it back if you leave your teaching job. If this is a plan that you left behind from a prior employer then you can roll it over to a Self Directed IRA (SDIRA) account and invest in real estate. To answer your question it's not a bad idea to buy real estate from your retirement funds. I did it in my own SDIRA by buying three turnkey properties recently. Your income or gains are tax-sheltered until you pull the money out. Hope this helps.

I'm by no means a expert but maybe @Dan Fisher might help elaborate here. I think if you use a SDIRA to invest into real estate then all the profits have to go back to the SIDRA. Also again I might be mistaken but YOU can't do the transaction and 3rd party would need to handle that on your behave.

Alfredo,

It's actually not a bad idea to do that. You can borrow out of your plan and fund your project, usually up to 50% of your 403B balance. You will be charged interest for your loan but you're paying back interest and principal back to yourself. Not a bad deal. I would suggest starting out slow with that one project, see how it goes and go from there. 

Dan

@Lennie Holland. Yes, that's correct income and profits need to be kept in a SDIRA. If they're pulled out you have to pay ordinary income tax on anything taken out. There are a number of rules on SDIRA and one is that any payments to you must be made to your IRA trustee and not to you personally such as "XYZ Trust Company FBO John Smith Account #12345".