Using 401K for investing
Investor · Seymour, IN · Member since 2016 · 165 posts · 32 votes
I am just getting started and I know that there is information on this - have read several things about utilizing a 401K for investing in RE. I am still unsure of how I can use my 401K. I am still employed, but am past the age that would restrict me from withdrawing it. My employer mentioned that I can move that money, but I am unsure of what to do with it.... borrow my savings for RE? Try moving it to a self directed IRA?
I'm unsure of ramifications to using that money, and how to do it with the least tax. Let me know if there are other posts that would clear this up for me.
Thanks for any help I can get to help clear this up in my mind.
I called the company that keeps our 401k from work and asked for a 50k check. at 3.25 percent, payable to me!
then I got another 18k and got me a house that cashflows nicely. one of the best decisions I have made.
George - Your post really doesn't tell us whether or not this was a good decision for you. How much was your money earning when it was in the 401k? Because you borrowed that $50K, it is no longer there earning a return. Because you have to pay 3.25% to borrow your own money, are you still making more than you would have?
The life insurance leverage strategies I advocate are so much more powerful than this approach. When you fund a high cash value policy, you do not borrow "from" the cash value (like you did), you borrow "against" the cash value. The insurance company is giving you a loan of their money with yours as the collateral. This strategy allows your money to literally work in two places at the same time.
I've known quite a few people that have been burned doing what you did. If that loan isn't paid back, the 10% penalty for early withdrawal applies if you are under 59.5 years old... plus the taxes.
i understand what you are saying and unless i keep the SAME investments in the 401k that the amount held, i'd never know how much i "lost" or "gained" by taking the money out. Maybe there is a way, but i am not that curious to know.
I am paying it monthly, over 5 yrs, from my paycheck at 3.25%. Maybe it's not the correct way, maybe not the best method. i know i'd never have gotten that house unless i took money from the 401, that's what's important to me.
The benefit of a 401k plan is tax deferral. When you put money in and as that money grows, it does so tax free. When you take money out for yourself, that is when taxes are paid.
So, when it comes to real estate investing, you could do one of two things in your situation:
Take money out of your plan, pay taxes on that money which will reduce the amount of capital you have available, and then invest personally in real estate. You would have free reign to invest as you choose and the income generated would be taxable to you.
Move money to a self directed IRA and invest the IRA money into real estate. This type of investing is a bit more restrictive in that you need to do things at arm's length and cannot use IRA owned properties or perform work on IRA owned properties. In this case, there would be no tax implication of moving the funds, so you would have the full amount to work with. Income generated from your investments would not be taxed as earned, but you would be taxed when you choose to take money out of the IRA for yourself.
Which makes more sense will depend on a lot of factors such as how long you intend to invest, when and how much you intend to distribute to yourself, what other income you have and your tax rate, etc.
Jack, I suggest that you start by learning more about the subject. There are many, many discussions here on BP forum on the topic of self-directed investing with your IRA or 401k. Just do the search and it'll keep you busy reading for hours.
Then you should reach out and speak with some of the experts in the field about your particular situation.
thanks. You are right-I need to search more, but when I do it seems like I get more confused. I do have a meeting scheduled for a week from tomorrow with a local CPA. Hopefully I will be able to straighten out my thinking on this subject.
Thanks again.
@Jack Middleton you can speak to your HR department to find out what your options are as far as moving the money to a self-directed IRA. If they allow "in service rollovers" I believe you would be able to do so. In addition to researching here on BP, it couldn't hurt to talk to a financial planner (fee only) since the tax implications of investing in RE with a self-directed IRA would be an important factor. Just make sure you vet them, and they don't try to sell you BS products. You want someone that can really tell you the best course of action given your personal financial/life circumstances.
it looks that Jack already investigated the 'in-service distribution' option and because he is past retirement age his employer allows that.
While financial planners can be helpful, most of them are unfamiliar with the self-directed IRA concept so he needs to be even more selective. And you are correct, you always have to watch out that you are getting advice that is suitable for your particular situation.
I did find out my employer allows in-service rollovers. I will definitely ask for opinions here after I speak to this CPA. Thanks for the information.
I did find out my employer allows in-service rollovers. I will definitely ask for opinions here after I speak to this CPA. Thanks for the information.
Jack,
A couple good sources for self education so you can ask your CPA and Attorney good questions when you get your responses are:
Leverage Your IRA
by Matthew M. Allen
Best price is on the NASB site.
and
Live Tax Free Forever (through Your Solo 401k)
by Michael J. McDermott
It is like a lot of real estate and financial books that really have an important message but limited scope. So some fluff to justify a book, but worth it.
A third but much drier and a tough read is:
The Self Directed IRA Handbook
by Mat Sorensen Attorney at Law
I suggest these because I have several replies (written) from Attorneys suggesting I try a firm more qualified in the IRA/Solo 401k area after discussions. Each was confident they were the firm for me until we got into specifics and my questions were backed by references. I like Attorneys and CPAs but not because they have the title.
As a multi-state investor I’ve had similar situations with CPAs in a new state, but more of a blank stare after the assurance that they were absolutely correct until specifics are discussed.
@Dmitriy Fomichenko looks like I read too fast. I thought he was talking about being past the age of being penalized for withdrawing from the 401k. I agree that he'll need to be very selective when looking for someone to advise him on this particular type of investment plan. While I have never utilized a financial planner for my own needs, I have heard more bad than good, so I hope he's able to find someone competent and professional.
I called the company that keeps our 401k from work and asked for a 50k check. at 3.25 percent, payable to me!
then I got another 18k and got me a house that cashflows nicely. one of the best decisions I have made.
Way to go George. That's good information.
@Sean Tracey - I am past that age so I could withdraw, but some companies will not let it active employees roll over (at least that is what I have read).
I called the company that keeps our 401k from work and asked for a 50k check. at 3.25 percent, payable to me!
then I got another 18k and got me a house that cashflows nicely. one of the best decisions I have made.
George - Your post really doesn't tell us whether or not this was a good decision for you. How much was your money earning when it was in the 401k? Because you borrowed that $50K, it is no longer there earning a return. Because you have to pay 3.25% to borrow your own money, are you still making more than you would have?
The life insurance leverage strategies I advocate are so much more powerful than this approach. When you fund a high cash value policy, you do not borrow "from" the cash value (like you did), you borrow "against" the cash value. The insurance company is giving you a loan of their money with yours as the collateral. This strategy allows your money to literally work in two places at the same time.
I've known quite a few people that have been burned doing what you did. If that loan isn't paid back, the 10% penalty for early withdrawal applies if you are under 59.5 years old... plus the taxes.
I called the company that keeps our 401k from work and asked for a 50k check. at 3.25 percent, payable to me!
then I got another 18k and got me a house that cashflows nicely. one of the best decisions I have made.
George - Your post really doesn't tell us whether or not this was a good decision for you. How much was your money earning when it was in the 401k? Because you borrowed that $50K, it is no longer there earning a return. Because you have to pay 3.25% to borrow your own money, are you still making more than you would have?
The life insurance leverage strategies I advocate are so much more powerful than this approach. When you fund a high cash value policy, you do not borrow "from" the cash value (like you did), you borrow "against" the cash value. The insurance company is giving you a loan of their money with yours as the collateral. This strategy allows your money to literally work in two places at the same time.
I've known quite a few people that have been burned doing what you did. If that loan isn't paid back, the 10% penalty for early withdrawal applies if you are under 59.5 years old... plus the taxes.
i understand what you are saying and unless i keep the SAME investments in the 401k that the amount held, i'd never know how much i "lost" or "gained" by taking the money out. Maybe there is a way, but i am not that curious to know.
I am paying it monthly, over 5 yrs, from my paycheck at 3.25%. Maybe it's not the correct way, maybe not the best method. i know i'd never have gotten that house unless i took money from the 401, that's what's important to me.
I have borrowed against my 401k. typically you can borrow up to half it's value and repay it through deductions from your regular pay. it's interest based, and I'm paying 4.5% In my case, I had the option to set the length of time to repay up to 5 years in 12 month increments.
My year to date return was pretty miserable (less than 6% at this time, but was near 1% at the beginning of this year). It's not taxed by taking it as a loan, and it's a much better vehicle for me to use it as an investment into my RE ventures at this time. The interest on the loan is a little high, and I will want to put the money back into the account as soon as possible. I repay it easily through my paycheck and there is no penalty when repay in full.
There are plusses and minuses to do this, and it makes more sense to my situation to utilize that money for a venture I can make 12+% on right now over the next few months than to hope it returns me something better than what the average is in stocks, etc.
hope this is valuable for you.
Thanks Kurt. That helps clear it up. I will investigate it with my fund.
You can certainly borrow against a 401k which is a nice option. I'm not an accountant. I had some rolled over IRAs from former employers with the big financial firms. It takes a lot of research to understand what a Self Directed IRA is, does and what you can and can not do. Once you feel like you get it, set that aside, have an adult beverage of your choice and be prepared. There's a few working parts to the equation. First, you'll want to find the place to open your account. I'm fortunate to have found a great place for my account (thank you RealTrust). Amy Holmes and the staff there have been immensely helpful. Once you get your account setup then put on your kevlar. When you call to roll over your IRA to a Self Directed vehicle (elsewhere), you'll encounter a gauntlet of resistance from the firm that holds it. Its not quite as bad as cancelling your cable subscription but darn close. Its your money, your choice. They'll tell you about all the wonderful tools and products they have to suit your needs. Can you choose whatever you want to invest in? Yes, if you want to invest inside their walls. Anything that doesn't involve them, Um, NO you may not. Therefore, you choose to use a Self Directed IRA. There's some particulars as to how the money is transferred which the holder of your Self Directed will tell you about. I have to say once I opened mine and fought to get my money free it was a real buzz. It's liberating to have control of your own capital. So my suggestion is read up on the subject and talk to some places that offer Self Directed IRAs. They'll have a good amount of knowledge to share. There's more complexities to a Self Directed that require awareness. They're not for everyone. That's ok. You're in charge so its really more a matter of how much risk you're comfortable with and how much time you want to spend managing your own money and learning the nuances of how to get the most out of it. I love it.
Thanks for the detail Steve. It sounds like it's worth the fight. I just don't want to loose out on the employer match, and pay tax on all that. I think I'll ask a firm those details.
thanks again,
Jack
I have borrowed against my 401k. typically you can borrow up to half it's value and repay it through deductions from your regular pay. it's interest based, and I'm paying 4.5% In my case, I had the option to set the length of time to repay up to 5 years in 12 month increments.
My year to date return was pretty miserable (less than 6% at this time, but was near 1% at the beginning of this year). It's not taxed by taking it as a loan, and it's a much better vehicle for me to use it as an investment into my RE ventures at this time. The interest on the loan is a little high, and I will want to put the money back into the account as soon as possible. I repay it easily through my paycheck and there is no penalty when repay in full.
There are plusses and minuses to do this, and it makes more sense to my situation to utilize that money for a venture I can make 12+% on right now over the next few months than to hope it returns me something better than what the average is in stocks, etc.
hope this is valuable for you.
It sounds like you borrowed "FROM" your 401(k), not "AGAINST" it. This is a big difference. The word "AGAINST" means that you pledged it as collateral/security for a 3d party loan. You cannot do this with a 401(k). It would be great if you could because you could put your money to work in two places at once. Your money is no longer invested in the 401(k).
sorry, @Thomas Rutkowski and @Jack Middleton
You are correct...it's a total misstatement...not sure how I did that. I borrowed FROM the 401k.
I apologize for any misunderstanding...Still glad I did, and I'm very happy with the terms and flexibility it has given me.
No problem @Kurt Gardner. I'm considering it and I see that it has benefits. I have a loan pending, but after that I may do the same thing with mine.
Just read this thread....speaking of using self-directed 401k's to invest in RE, could anyone recommend a company to help me rollover my traditional 401k into a solo 401K? I've been talking to a company out of Monsey, NY called Broad Financial. Another one I found online called Self Directed Retirement Plans LLC out of Goodyear, AZ. Any insight/recommendations/advice would be greatly appreciated as I may be suffering from analysis paralysis! :/
What you will find in this industry is that there are document providers and then there are firms that provide comprehensive ongoing support as you invest with the plan that has been created.
If you speak to a few firms, you will start to be able to tell the difference.
Get client references. I'm sure you will also get some feedback from members who have used various providers.
I agree with Brian. I'm hearing from more and more people who have setup 401k plans with companies that do not offer ongoing support and some don't even support the documents they provided (that is, keep the plan compliant with ongoing document updates as needed for regulatory amendments, no less discretionary amendments).
Thank you Brian and Justin! I think that is what BF is...they provide the documents but are not able to give ongoing investment support/advice. I did ask for references from BF and spoke with two different people. Both used BF to set up the solo 401k and seemed content with the service, but they did not use them after that. Just starting down this RE investment road so it is important to me to have ongoing support long after I write the check. I hope to soon hear from BP members who have used various providers.
Just read this thread....speaking of using self-directed 401k's to invest in RE, could anyone recommend a company to help me rollover my traditional 401k into a solo 401K? I've been talking to a company out of Monsey, NY called Broad Financial. Another one I found online called Self Directed Retirement Plans LLC out of Goodyear, AZ. Any insight/recommendations/advice would be greatly appreciated as I may be suffering from analysis paralysis! :/
I used Sense Financial. @Dmitriy Fomichenko is here on BP and has been very helpful during the process and after I was up and running as well. I also liked these two books:
Leverage Your IRA
by Matthew M. Allen
Best price is on the NASB site.
and
Live Tax Free Forever (through Your Solo 401k)
by Michael J. McDermott
It is like a lot of real estate and financial books that really have an important message but limited scope. So some fluff to justify a book, but worth it.