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Steven Hershey
  • New to Real Estate
  • Lancaster, PA
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401k Withdraw Good or Bad idea?

Steven Hershey
  • New to Real Estate
  • Lancaster, PA
Posted Dec 8 2019, 20:15

I have this Idea of taking a 20% withdraw for a down payment out of my 401k to avoid PMI costs and down the road to grow my properties to gain financial independence. I understand all of the consequences like 20% fed tax/10%penalty and a 3.07% state tax for PA. I would be only looking to pull enough out for only a 20% down payment, Im 32 years old and have 120k+ in my 401k with a 7.5% inception gain. Now my plan is to do the BRRRR strategy, I can pay the 10% penalty back in a few years 2 ways, upping my contribution which was already the plan or I can pay it back with the cash flow out of the rental property. The contribution change would be the most ideal with changing withholding's in my check which I can afford. Im really hesitant on this decision because of the amount I would have to withdraw just to get my 20%. I have 60k withdraw room to work with before I would get pushed into the next tax bracket.

I know 99.9 percent of people would say DO NOT TOUCH YOUR 401k, but im thinking different. No Matter what I will be paying those taxes in later years after I withdraw them for retirement... and the Goal is always to make more money right? well ill probably have to pay more taxes in 30 years then I do now. I am projecting(based on my wife's job and my increases) we will be one tax bracket higher then we are now at retirement(24%) and those will change with ever election. So would it  make sense?

This is really the only option we have at the moment, we have a large HELOC out that we used to consolidate student loans and we do not have extra cash for a 20% down payment. We are patient and not rushing into anything.

Any insight would be highly appreciated and I am not trying to talk myself into this, I just think it makes sense. I will still work my full time job contributing to my 401k for the next 30 years times 2(wife) to save for retirement.

Has anyone else ever did this, or ran actual numbers on a done deal. I know real estate renting can make 10%+ return and that is much better than my 7%. My only take back is the cash flow might not be always saved, hence BRRRR, I would like to grow from 2 to 4 to 8 to 12+ units. I would have actual money on hand to wait patiently to make a move on a good deal.

I appreciate all help and opinions, please tell me how it is. Ive been debating this for the last few months and watching how the market and housing market with interest rates have been moving, Waiting for a market pullback to make a move. In the mean time ill be sitting here doing my diligence and reading all the great posts and educating myself in every aspect.

Thank you for your time.

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Replied Dec 9 2019, 17:26

@Steven Hershey

Don't forget you can always have the pmi taken away once the property appreciates enough so that you have a 22% equity in the property. No need to refinance, all you have to pay is another appraisal on the house to proof the bank the new value of the house.

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Matt Groth
  • Contractor
  • Grand Marais, MN
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Matt Groth
  • Contractor
  • Grand Marais, MN
Replied Dec 9 2019, 17:45

We did this, and it turned out very well, but it was unique circumstances. I wouldn't do it for just any buy and hold. The numbers need to be outstanding, not just good. Since you plan on paying it back, the better option would be to take on a partner. If you think you can pay it back in 2 years, offer that to a fellow investor. Buy it as a partnership, and you can buy them out over time. If you factor in the tax hit on the 401k , you can offer someone really great returns. It didn't cost you any more, it made a another investor very happy, and you still have your 401k intact.

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DJ Dawson#1 Sacramento Real Estate Forum Contributor
  • Real Estate Agent
  • Sacramento, CA
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DJ Dawson#1 Sacramento Real Estate Forum Contributor
  • Real Estate Agent
  • Sacramento, CA
Replied Dec 9 2019, 18:11
Originally posted by @Steven Hershey:

@Daniel Hughes Im not 100% but i will be employed with this company until i retire.

let me just challenge this brotha by the other side of this right, so think of the INFINITE realities in which you do switch jobs, move, goals change, triplets, divorce, family death, acid to the eyes and you go blind, you see where i am going with this. While i don't know anything about your specific situation I suggest saying the next 3-5 years can be fairly certain but just reevaluate accordingly and never assume what you will be down 5+ years down the road.

good luck man.

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David Flores
  • Rental Property Investor
  • Morgantown, WV
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David Flores
  • Rental Property Investor
  • Morgantown, WV
Replied Dec 9 2019, 18:18

100% take your money out of your 401k. Think about all the additional benefits of buying a rental property that your 401k will not produce. Your going to put down 33k but then after that you have tenants paying off a huge investment for you, plus you will have additional cash flow on top of this. 401ks are great, but real estate is the better investment. After 30 years that 33k in your 401k will probably be around 100k, given a 5% average return. After 30 years though your property will be worth over 300k, depending on the market this could be wayy higher, given appreciation and tenants paying off your investment for you.

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Replied Dec 9 2019, 20:02

@Steven Hershey from a pure financial perspective it doesn’t make sense but emotionally you can justify anything. If the goal is to grow your net worth then taking money from 401k might not be the best approach.

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Justin Miles
  • Flipper/Rehabber
  • Alpharetta, GA
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Justin Miles
  • Flipper/Rehabber
  • Alpharetta, GA
Replied Dec 9 2019, 20:32

@Steven Hershey correct me if I’m wrong but if you are under the scope of a proper brrrr, would you not have 20- 30 percent equity on the refinance and be able to remove the pmi on the new loan? So a year or 2 of pmi versus the 401k penalty’s.

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Steve Vaughan
  • Rental Property Investor
  • East Wenatchee, WA
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Steve Vaughan
  • Rental Property Investor
  • East Wenatchee, WA
Replied Dec 9 2019, 20:41

Option C- sacrifice a little bit and save organically.   Option B would be to borrow from the 401k, but only if it's a screaming deal.  Maybe.

Either way, things are super thin if ya can't handle the payments of a 401k loan.  There are larger things going on here.  Not having money is a symptom of other behaviors here.

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Steve B.
  • Engineer
  • Portland, OR
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Steve B.
  • Engineer
  • Portland, OR
Replied Dec 9 2019, 21:44

The way people are talking about tax brackets in this thread makes me think they don’t understand marginal tax rates and don’t prepare their own taxes.

Also you may want to look up difference between present value and future value of money . Finally, I think you should reread what @Bill Brandt is telling you because I’m guessing a few of you are missing his points.

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John Calcaterra
  • Real Estate Broker
  • Loganville, GA
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John Calcaterra
  • Real Estate Broker
  • Loganville, GA
Replied Dec 10 2019, 01:11

@Steven Hershey

I did a similar thing 9 years ago with my 401k. Now I control my time and my money. I don’t punch a time clock, I say you go for it. Money lives on the other side of fear.

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Mindy Templeton
  • Investor
  • Lees Summit, MO
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Mindy Templeton
  • Investor
  • Lees Summit, MO
Replied Dec 10 2019, 04:51

@Steven Hershey If I were in your shoes..I would be decreasing monthly expenses in any way that I could, including a part time job to increase income and spend some time paying off those student loans. THEN you could take the money you were paying on those loans to put towards monthly installments on the HELOC or a loan from 401k. Do you have other consumer debt? If you free up those debts, then you could have more monthly to help you accomplish your goals without withdrawing. Also, if you're still contributing now, are you doing more than the match? Maybe lower the contributions to just get the match and put the rest in savings. Just some alternatives to consider before tapping in to 401k. I became consumer debt free and used a 401k loan for our first rental and am almost done paying it back. This method is just something to consider, as real estate investing is a great next step IMO, once you are consumer debt free.

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Brian Simpson
  • Grandview, TX
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Brian Simpson
  • Grandview, TX
Replied Dec 10 2019, 06:48

I agree with @Jingwen Dunford Been there done that and never looked back 401K is a horrid retirement vehicle when compared to real-estate in my opinion. We took 50K and turned it into 120K in 6 months. Note this was for a rental property and not our home so we got the return and paid it back.

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Replied Dec 10 2019, 12:26

@Paul Enzinger I like your style man. Logical thinking. You must've read Robert Kiyosaki's new book (called FAKE) I assume. He does mention lots of things, including paper assets.

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Account Closed
  • Rental Property Investor
  • New Braunfels, TX
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Account Closed
  • Rental Property Investor
  • New Braunfels, TX
Replied Dec 10 2019, 14:20

@Steven Hershey

I wouldn’t accept the 7% return from your 401k, you need to learn what funds are available and re distribute your balance among those funds to get a better return. As for borrowing from your 401K, you have been given a lot of good advice. Take it from someone who was blessed to be able to retire at 55 because I started investing into my 401K when I was 21, compound interest is your friend.

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Steven Hershey
  • New to Real Estate
  • Lancaster, PA
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Steven Hershey
  • New to Real Estate
  • Lancaster, PA
Replied Dec 10 2019, 18:32

Thank you all so much for the insight, i have the best of all worlds here and i will be doing my diligence on property analysis and be patient. I think after all these post Paying the PMI is probably the way to go, work the Brrrr and let that work in my favor, if a great cash flow deal comes up i may use some small funds out of my 401k to cash in big.

Biggerpockets is such a great tool, i will invest more time reading logs and post to educate myself!

thanks again