9 Replies

Should i liquidate my 401k and start out real estate?

If you can, roll it over to a self-directed 401k or self-directed IRA.

@Alan Chau

It is generally best not to distribute funds from a 401k because the distribution will b e subject to federal and, depending on your state of residence, state taxes. Also, if you are under age 59 1/2, the 10% early distribution penalty will also apply. 

Therefore, if you want to continue to preserve the tax deferred growth of the 401k, you may want to consider transferring it to an IRA or a solo 401k, as both allow for investing in real estate.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes at time of distribution;
  • Both allow for checkbook control for placing alternative investments;
  • Both may be invested in annuities;
  • Both are protected from creditors;
  • Both allow for nondeductible contributions; and
  • Both are prohibited from investing in assets listed under I.R.C. 408(m).

The Self-Directed IRA and Solo 401k Differences

  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company ( IRA LLC) must be utilized;
  • The solo 401k allows for checkbook control from the onset;
  • The solo 401k allows for personal loan known as a solo 401k loan;
  • It is prohibited to borrow from your IRA;
  • The Solo 401k may be invested in life insurance;
  • The self-directed IRA may not be invested in life insurance;
  • The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
  • Pre-tax IRA contributions on reported on line 32 of Form 1040;
  • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.
Originally posted by @Alan Chau :

Should i liquidate my 401k and start out real estate?

You can actually invest with your self directive IRA as a passive investor into

the multifamily project. You can not be a lead investor if you are investing funds from your self directed IRA. All the income will flow back to the IRA and will be tax differed ..

@Alan Chau , how much is in the 401k and how old are you? What other forms of retirement savings do you have? 

Cashing out the 401k will come with a 10% early withdrawal penalty on top of the 20% your plan administrator is required to withhold and send to the IRS for taxes you owe on the money. 

You could roll it over into an IRA and not pay the fees - but make sure you set up the new plan and have the check from the existing plan made out to the new plan - not you!

The rules change if you are over 59-1/2.

@Alan Chau roll it over and get it in a self-directed plan. I have a great person you can talk to about getting into a self directed plan, let me know if you have any questions 

The Book 401(k)aos by Andy Tanner is an excellent example of how the 401K process robs you of true wealth and negates your gains. Roll it over into a Self Directed IRA.

im 33 i only have 80k in it

Originally posted by @Alan Chau :

Should i liquidate my 401k and start out real estate?

 Hi Alan, 

How did you go about this? I am currently in the same situation and looking into the best way to do it and avoid all the penalties of withdrawal.

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