cashing in 401k? rethinking retirement.
Member since 2023 · 2 posts · 1 vote
cashing in 401k? rethinking retirement.
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Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votesI found myself in a similar position to you about 10 years ago. Fact is, I had some assets but not enough money to invest from a position of strength. You can either bridge that gap by piling up more money or living with less comfort.
You either need to find a way to make and save more money or look into owner occupied investment strategies like a live in flip or house hack. I understand if you don't want to do that. I'm 42 with a wife and two kids. We're on our 3rd live in flip. It sucks. My family of 4 is currently sharing 1 bathroom. I am financially independent and don't have a job, though. It has been worth the hassle.
I have nothing to sell and would be happy to help if you think that I can be a resource. Feel free to reach out.
10 Replies
- Rental Property Investor · New Braunfels, TX · Member since 2022 · 408 posts · 408 votes1y
Quote from @Curtis Cutler:
Hello all, I'm trying to rethink my retirement plans. I lived in NYC and worked for the city until I was terminated for not taking the covid vaccine. There's a lot more to the story. We had to move to SC. I have a 401k/457 sitting there as stagnant money in NYC. About 90k that will be taxed at 40% if I take it now. If I transfer the money to my current job I cant barrow from it. I also can take out a home equity line of credit on my current home....but I need direction.
I'm thinking long term rentals will be a good retirement plan. I'm 45 years old.
Transfer the $90K to a SDIRA, never transfer to a new company. You can buy a rental house, put $60,000 down and you will have to get a non-recourse loan for the rest of the mortgage. Then keep $30,000 in reserves in a hysa for emergencies. All rents you get from this property has to go back into the SDIRA but if you get a 20 year mortgage (that the rent can cover) and can pay the rental off by age 65 you will have turned that $90K into several hundred thousand’s of paid off real estate. You wont pay capital gains when you sell the house as long as it is in the SDIRA but you will have to pay normal income tax when you withdraw cash from the SDIRA after retirement but would you rather pay income tax on $90K or $300K?
Or take the 40% hit now and put the $54K into a Roth IRA and do something similar.
Best of luck! - 1yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Quote from @Account Closed:
Quote from @Curtis Cutler:
Hello all, I'm trying to rethink my retirement plans. I lived in NYC and worked for the city until I was terminated for not taking the covid vaccine. There's a lot more to the story. We had to move to SC. I have a 401k/457 sitting there as stagnant money in NYC. About 90k that will be taxed at 40% if I take it now. If I transfer the money to my current job I cant barrow from it. I also can take out a home equity line of credit on my current home....but I need direction.
I'm thinking long term rentals will be a good retirement plan. I'm 45 years old.
Transfer the $90K to a SDIRA, never transfer to a new company. You can buy a rental house, put $60,000 down and you will have to get a non-recourse loan for the rest of the mortgage. Then keep $30,000 in reserves in a hysa for emergencies. All rents you get from this property has to go back into the SDIRA but if you get a 20 year mortgage (that the rent can cover) and can pay the rental off by age 65 you will have turned that $90K into several hundred thousand’s of paid off real estate. You wont pay capital gains when you sell the house as long as it is in the SDIRA but you will have to pay normal income tax when you withdraw cash from the SDIRA after retirement but would you rather pay income tax on $90K or $300K?
Or take the 40% hit now and put the $54K into a Roth IRA and do something similar.
Best of luck!In my opinion, $90,000 is too little capital to invest in real estate within a retirement account plan.
LTV's are lower when investing with a retirement account plan - Around 65%
Meaning if you were to use $60,000 as a down payment, you would likely only buy a house around $70,000.
$8,000 would likely go away in closing costs. You would then stress to not incur any improvement cost above $22,000 or you may have to liquidate the property.
In this scenariod, $60,000 if you are making an above return at 10% to 12% annually + $30,000 making $4% in a HYSA, the average return is maybe around 8%
The blended return would be about 9%
You may be better off investing in the stock market, get a slightly lower return but without all the added stress / work.
Basit Siddiqi CPA4.979 Reviews - 1yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votesWhat is the interest rate on the HELOC?
Quote from @Curtis Cutler:
Hello all, I'm trying to rethink my retirement plans. I lived in NYC and worked for the city until I was terminated for not taking the covid vaccine. There's a lot more to the story. We had to move to SC. I have a 401k/457 sitting there as stagnant money in NYC. About 90k that will be taxed at 40% if I take it now. If I transfer the money to my current job I cant barrow from it. I also can take out a home equity line of credit on my current home....but I need direction.
I'm thinking long term rentals will be a good retirement plan. I'm 45 years old.
Can you make a higher return than what the interest rate on the HELOC?
If the interest rate is 6%, are you sure you can make above 6%?
In the past, I cashed out my 401K(Paid income tax + Penalty). I used the funds to acquire real estate that appreciated signficantly. I am happy that I made the decision. However, I made the decision when interest rate was lower and there was support for an appreciating real estate market. I am not sure if I would make the same decision today.
However, if you think you can purchase real estate and have a SIGNIFICANT delta as an investment, I would not cash out the 401k now to buy real estate.Basit Siddiqi CPA4.979 Reviews - MD/DC · Member since 2024 · 1k+ posts · 1k+ votes1y
I was leveraged to the point of being uncomfortable when I was single and in my 20s so I get the idea but don’t recommend pulling money out of a retirement fund. Transfer it to new job and find other ways to raise capital for RE. Taking money out of 401k is expensive and you can’t get back the tax benefits of having the money passively grow for decades tax free until distribution.
- Rental Property Investor · New Braunfels, TX · Member since 2022 · 408 posts · 408 votes1yI have to agree, I forgot about the 65% LTV with SDIRA mortgages.
Quote from @Basit Siddiqi:
Quote from @Account Closed:
Quote from @Curtis Cutler:
Hello all, I'm trying to rethink my retirement plans. I lived in NYC and worked for the city until I was terminated for not taking the covid vaccine. There's a lot more to the story. We had to move to SC. I have a 401k/457 sitting there as stagnant money in NYC. About 90k that will be taxed at 40% if I take it now. If I transfer the money to my current job I cant barrow from it. I also can take out a home equity line of credit on my current home....but I need direction.
I'm thinking long term rentals will be a good retirement plan. I'm 45 years old.
Transfer the $90K to a SDIRA, never transfer to a new company. You can buy a rental house, put $60,000 down and you will have to get a non-recourse loan for the rest of the mortgage. Then keep $30,000 in reserves in a hysa for emergencies. All rents you get from this property has to go back into the SDIRA but if you get a 20 year mortgage (that the rent can cover) and can pay the rental off by age 65 you will have turned that $90K into several hundred thousand’s of paid off real estate. You wont pay capital gains when you sell the house as long as it is in the SDIRA but you will have to pay normal income tax when you withdraw cash from the SDIRA after retirement but would you rather pay income tax on $90K or $300K?
Or take the 40% hit now and put the $54K into a Roth IRA and do something similar.
Best of luck!In my opinion, $90,000 is too little capital to invest in real estate within a retirement account plan.
LTV's are lower when investing with a retirement account plan - Around 65%
Meaning if you were to use $60,000 as a down payment, you would likely only buy a house around $70,000.
$8,000 would likely go away in closing costs. You would then stress to not incur any improvement cost above $22,000 or you may have to liquidate the property.
In this scenariod, $60,000 if you are making an above return at 10% to 12% annually + $30,000 making $4% in a HYSA, the average return is maybe around 8%
The blended return would be about 9%
You may be better off investing in the stock market, get a slightly lower return but without all the added stress / work. - 1yTravis TimmonsPro MemberRental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
I found myself in a similar position to you about 10 years ago. Fact is, I had some assets but not enough money to invest from a position of strength. You can either bridge that gap by piling up more money or living with less comfort.
You either need to find a way to make and save more money or look into owner occupied investment strategies like a live in flip or house hack. I understand if you don't want to do that. I'm 42 with a wife and two kids. We're on our 3rd live in flip. It sucks. My family of 4 is currently sharing 1 bathroom. I am financially independent and don't have a job, though. It has been worth the hassle.
I have nothing to sell and would be happy to help if you think that I can be a resource. Feel free to reach out.
- Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes1y
Quote from @Curtis Cutler:
Hello all, I'm trying to rethink my retirement plans. I lived in NYC and worked for the city until I was terminated for not taking the covid vaccine. There's a lot more to the story. We had to move to SC. I have a 401k/457 sitting there as stagnant money in NYC. About 90k that will be taxed at 40% if I take it now. If I transfer the money to my current job I cant barrow from it. I also can take out a home equity line of credit on my current home....but I need direction.
I'm thinking long term rentals will be a good retirement plan. I'm 45 years old.
Are you expecting a settlement from the city for termination?
You have a lot going on and if you had a 457 you were a highly compensated EE.
I love me some real estate but just owning LTR is not a retirement plan.Take your time and really think through your purpose and perspective before making a move.
Do an actual tax projection first before jumping to conclusions. You can do this yourself or find a professional to help on BP.
- 1yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Curtis Cutler
I started investing 10 years ago at 44 years old. I was broke and didn't know what to do. I only had 25k in savings. lol. I bought my first two rental houses with a combination of using a HELOC on my primary and using my retirement $. People told me I shouldn't use my retirement funds to get started, but glad I did. I didn't have much money and needed to find a way to get in the game. 10 years later, I've got 29 SFR that profit 19k/month (not including things breaking or vacancies). Give yourself 5-10 years and you'll be set. And I'm all for tapping into funds anyway you can to buy cash flowing real estate. It's tax free profits due to our tax code. And a great hedge against inflation. Not to mention it will create generational wealth for your family if you keep scaling up with leverage over a 10 year period or so. Good luck!
- 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Curtis Cutler Avoid cashing out your 401(k)/457 to minimize taxes and penalties, potentially up to 40%. Instead, roll the funds into an IRA or Self-Directed IRA (SDIRA) to keep them tax-deferred and open up flexible investment options, including real estate. With an SDIRA, you can invest in long-term rentals while preserving your retirement savings, but you must follow strict IRS rules:
1. No Personal Use: You or family members cannot live in or personally use the property.
2. Expenses Paid by the SDIRA: All property-related expenses (e.g., repairs, taxes) must be paid directly from the SDIRA.
3. No Sweat Equity: Repairs or maintenance must be done by third parties and paid for by the IRA.
4. Prohibited Transactions: Avoid transactions with "disqualified persons" (yourself, family, etc.).
Alternatively, consider leveraging a HELOC (Home Equity Line of Credit) to access capital for investments. HELOCs often have lower interest rates, and the interest may be tax-deductible if used for investment purposes. However, ensure you have a solid repayment plan to avoid over-leveraging your home.
Focus on long-term rentals that generate steady cash flow and offer tax advantages, such as depreciation and deductible expenses. This approach can create a sustainable retirement income while preserving your retirement accounts for long-term growth.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
INVESTOR FRIENDLY CPA®5241 Reviews - Member since 2023 · 2 posts · 1 vote1y
Quote from @Jonathan Bock:
Quote from @Curtis Cutler:
Hello all, I'm trying to rethink my retirement plans. I lived in NYC and worked for the city until I was terminated for not taking the covid vaccine. There's a lot more to the story. We had to move to SC. I have a 401k/457 sitting there as stagnant money in NYC. About 90k that will be taxed at 40% if I take it now. If I transfer the money to my current job I cant barrow from it. I also can take out a home equity line of credit on my current home....but I need direction.
I'm thinking long term rentals will be a good retirement plan. I'm 45 years old.
Are you expecting a settlement from the city for termination?
You have a lot going on and if you had a 457 you were a highly compensated EE.
I love me some real estate but just owning LTR is not a retirement plan.Take your time and really think through your purpose and perspective before making a move.
Do an actual tax projection first before jumping to conclusions. You can do this yourself or find a professional to help on BP.
Thanks for the response. I am currently in a state suit ( which we won). We were told to Go back to work and receive back pay. The SI supreme court Ruled the mandates arbitrary and capricious... NYC continues to appeal.
Also a federal suit...I was Denied a religous exemption despite being a clergy member.
They owe me 3 years at 100k a year.
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