Rental Property Investor · Palm Beach County, FL · Member since 2016 · 150 posts · 40 votes
Hi BP community,
I have 403b from an old employer that I want to use to invest in RE. There is just under 100k in this account and when looking to withdraw the money, I was told I would incur over 30k on fees and penalties.
Been reading articles online and one is more confusing than the other. One article says something while others say something else completely different. Was hoping someone in the forums had done this before and was successful in doing so. Is there a difference between the withdrawal guidelines between a 401k vs a 403b? Any guidance would be extremely appreciated.
@Tarcizio Goncalves If you withdraw money out of the 403b to yourself, that is a taxable event. The $100K would be added to your taxable income for the year and there would be an additional 10% penalty for early distribution if you are under age 59 1/2. These are the same rules for most all retirement plans.
The alternative would be to rollover the 403b to a self-directed IRA or Solo 401(k). This would keep that money in a tax-sheltered retirement plan, but allow you to invest the plan into real estate instead of just the stock market. This is not YOU getting access to the money, but rather you diversifying your retirement plan. All investments must be at arm's length and exclusively for the benefit of the plan. The plan buys real estate and receives the income the real estate produces.
@Tarcizio Goncalves If you withdraw money out of the 403b to yourself, that is a taxable event. The $100K would be added to your taxable income for the year and there would be an additional 10% penalty for early distribution if you are under age 59 1/2. These are the same rules for most all retirement plans.
The alternative would be to rollover the 403b to a self-directed IRA or Solo 401(k). This would keep that money in a tax-sheltered retirement plan, but allow you to invest the plan into real estate instead of just the stock market. This is not YOU getting access to the money, but rather you diversifying your retirement plan. All investments must be at arm's length and exclusively for the benefit of the plan. The plan buys real estate and receives the income the real estate produces.
With a self-directed Solo 401(k), all of the plan funds are available to be invested. However, it is the plan that is the investor, not you. You are only growing your future retirement savings and cannot access the cash flow. If you take money out of the 401(k) personally, then you pay taxes (and 10% penalty if you are under 59 1/2).
When you think about a $50K or 50% (whichever is lesser) limit, that is borrowing from your plan to access the money personally. That is not generally the best strategy for real estate investing.
If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.
Solo 401k vs. Self-directed IRA
A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:
Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax
General Considerations Re Investing Retirement Funds in Real Estate:
1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).
2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.
3. In either case, all of the income and expenses will need to flow in and out of the retirement account.
4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.
5. In either case, you can't live on the property or otherwise use it for personal use.
6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).
7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).
8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).
As mentioned, you can invest Solo 401k funds directly into real estate or you can take a participant loan up to $50k. If you take a participant loan from a Solo 401k and use the loan proceeds to invest into real estate:
The loan funds are your until paid back to the plan; the investment will be done outside of the plan
While prohibited transaction rules would not apply to the investment, the 401k tax advantages would not either
The loan term can be up to 5 years, but fully amortized payments need to be made at least quarterly. More creative loan repayment (interest-only, deferred payments with a balloon, etc. would not be compliant).