self-directed 401 k loan

4 Replies

I'm interested in rolling over my 401k into a solo 401 K in order to take out money for a down payment on investment property. is this a good idea or a bad idea? I'm wondering if it is a better idea than pulling my retirement And taking the tax penalties

It's a great idea but you need to be careful since there are rules around this option. Google Equity Trust Company. I use them and they do fine. The process to move money or pay bills is slow. Home Depot and Lowes do not accept 3rd party checks.

Don't take cash out of your 401k because you will pay high taxes.

@Walker Seid

I don't think taking early distributions, paying taxes and penalties (both on state and federal level) and then investing the rest is wise financial move. Depending on your tax bracket it may end up costing you nearly 50% of the amount you take out! The fact that you can still use those funds to buy investment property using tax-deferred environment makes the first option even less appealing.

I would suggest you you explore the option of using truly self-directed Solo 401k instead of SD IRA. There are several major advantages of using this investment vehicle, you can check my other posts to learn more but here are just a few:

  1. Checkbook control - you don't have to deal with a custodian when making investments or paying expenses, simply write the check.
  2. If you use leverage when buying investment property by using Solo 401k you will avoid paying UBIT.
  3. Access to your retirement funds even before you retire via loan feature.

Keep learning and educating yourself!

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Originally posted by @Walker Seid :
I'm interested in rolling over my 401k into a solo 401 K in order to take out money for a down payment on investment property. is this a good idea or a bad idea? I'm wondering if it is a better idea than pulling my retirement And taking the tax penalties

Walker, let's define our terms here. You said "in order to take money out ..."

Out has no meaning in terms of retirement plans. With 401Ks, there are DISTRIBUTIONS and LOANS. Either of these could mean "out". The advantage of a 401K is that you can take a LOAN rather than a DISTRIBUTION. IRAs only have distributions which incur taxes and penalties. With a 401K you can take a participant loan. The loan has some restrictions: You can borrow 50% of your 401K up to $50,000. You get to pick the interest rate, within IRS guidelines. The loan can be amortized for up to 5 years (longer if for the purchase of your home), and it can be paid back either monthly or quarterly. You can pay it back either according to the amortization schedule, or you can pay it all off at once, but you may not make irregular payments to it (something like getting your tax return back or getting a bonus).

Now here's the super-double bonus. If you use your participant loan for business purposes, such as a real estate investment, the interest you pay your plan is TAX DEDUCTIBLE!

So think of "OUT" two ways. If you take a distribution, you'll be out the taxes and penalties you'll pay, and that money is gone forever.

If you take a participant loan, well, you'd just be OUT of your mind not to.