Keep 401K or invest $ on a rental property?
Wholesaler · Green Brook, NJ · Member since 2016 · 15 posts · 1 vote
Keep 401K or invest $ on a rental property?
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Investor · Cary, IL · Member since 2014 · 124 posts · 95 votes
10yI'm not an accountant so take my advice with a grain of salt, but I would avoid paying such a huge chunk in penalty and taxes by doing the early withdrawal. One option you may want to explore is taking out a loan from your 401k. Depending on the company that services your account, you can borrow up to 50% of your vested balance up to $50,000. You make loan payments back to your 401k account from your payroll check at generally 1-2 points above the prime rate. It's a pretty cool option that I took advantage of to get started. I would talk to whomever services your 401k to see what your options are.
30 Replies
- Atlanta, GA · Member since 2015 · 157 posts · 83 votes10y
Invest it in real estate...FAST
- Investor · Cary, IL · Member since 2014 · 124 posts · 95 votes10y
I'm not an accountant so take my advice with a grain of salt, but I would avoid paying such a huge chunk in penalty and taxes by doing the early withdrawal. One option you may want to explore is taking out a loan from your 401k. Depending on the company that services your account, you can borrow up to 50% of your vested balance up to $50,000. You make loan payments back to your 401k account from your payroll check at generally 1-2 points above the prime rate. It's a pretty cool option that I took advantage of to get started. I would talk to whomever services your 401k to see what your options are.
- clinical application analyst · Saint Petersburg, FL · Member since 2015 · 41 posts · 5 votes10yConsider moving it to a self directed IRA.
- Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes10y
@Kitty Jedra I would agree with @Elizabeth J Humphrey and move it into a SDIRA to earn more and not be penalized for the withdrawal.
I'm about to embark on the same thing to invest in notes with some of the IRA that will be a portion transferred over to a SDIRA. This way your are still investing and not getting hit with penalties.
I don't know your particular situation but if you are younger and have a longer investment time period it may be well worth it.
Good luck...
- Real Estate Broker · St. Louis, MO · Member since 2014 · 206 posts · 194 votes10y
Do not withdraw it early.... You will face a large penalty, and the remainder will be treated like ordinary income. Your tax bill will take a large portion of it.
I second the idea of a self directed IRA. This option would still allow you to keep making tax advantaged contributions to your retirement account as well.
- Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes10y
You will lose about 45% of the amount you cash out due to taxes and penalties. I would talk to a financial advisor as well to understand your retirement target number.
- Pleasanton, CA · Member since 2015 · 246 posts · 115 votes10y
I will give a contrary opinion. If you have 70K in 401k, its not a large enough some for you to incur the costs of managing a SDIRA to invest in real estate. I have looked at the fees and they add up quite a bit. Next, I wouldn't suggest you withdraw at any costs esp. paying a penalty. If you can move your 401k (its from a ex-employer), doesnt hurt to move to a IRA and then use a asset manager with low costs like https://www.wealthfront.com/ or vanguard.com and use them to conservative target 2040 funds.
The key for you at your age is to be conservative with your retirement nest egg. If you have enough cash for a down payment (say 20K) and can get a mortgage use it to do a buy and hold investment in a safer Midwest SFH or duplex (B neighborhoods). Its not as easy to make money in real estate until you scale up- take some of the feedback that suggests that there is easy money with a grain of salt
- Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes10y
Originally posted by @Kitty Jedra:
Hello Everyone,
I am in my mid fifties and thinking of how to best prepare for retirement. I have about $70,000 in a 401K and wondering if it would be wise take this money and invest it in a rental/cash flow property. I realize that Uncle Sam will be taking a good part of the 401K if I withdrew it before retirement. Your thoughts would be greatly appreciated!
Kitty
The answer you're looking for depends on many variables. What would be more helpful is a customized response from someone you actually have a relationship with that knows you.
Personally, I minimized my 401k contributions and only out in amount that would be matched. I put all other money into investing in real estate. Then I "retired" from corporate America at age 33. Even though I pay taxes for removing 401k money, I generate a 20%+ return annually with this money so, for me, it was the better choice.
We are not the same. Your answer depends on you, your investment goals, abilities, interests, choice of the type of life you'd like and the responsibilities you'd be willing to take on, etc.
- Investor · Waltham, MA · Member since 2016 · 7 posts · 1 vote10y
Hello. I am 32 and recently moved jobs. I had about $70k in my 401k and I moved the 401k into an IRA. When I was setting up my 401k through my new job contributing about $15,000/year, I started to wonder if I should just save the $15,000/yr (for maybe 5 years) and invest in a multifamily. I wonder if I might have a bigger ROI on the multifamily. Thoughts?
- Pleasanton, CA · Member since 2015 · 246 posts · 115 votes10y
The greatest thing about a 401k is that it enforces discipline and makes it harder to not dabble in building a retirement nest egg through penalties and upfront tax savings. It does it with a lot less work and time (re-balancing/dollar cost averaging etc.) than the extra net returns you can get from doing it via real estate. The things folks miss about real estate is the large sized transaction costs at purchase & sell. So its better to do fewer quality deals than buying a larger no. of lower priced properties. Some folks say 401k is tax deferred and you most likely will have higher taxes when you retire. The thing lot of them miss is that you don't need to withdraw all of it in same year and you can retire in a state with no state taxes. You can withdraw 5% of your 401k balance starting at retirement every year and not pay much in taxes.
The question is can you afford to max your 401k and also save enough for a down payment on multi family. You always can take a loan from your 401k if that crazy deal does show up.
I have been maxing my 401k every year since 2002 and last I checked (just now), it is at 460K with 175K from the employer matches. If everything else I do fails and at retirement need the cash, i have my 401k to bank on.
Great success story. My advice to Adam is assuming he is the regular Joe than a real estate pro. Hopefully we can all replicate your success at which point worrying about 401k or a pay check is a moot point.
Cheers
Sunny
- Woodbridge, VA · Member since 2015 · 44 posts · 7 votes10y
I'm with @Michael R., borrow against it if you can. I did that with my TSP to clear up debt and I'm glad I did. As long as its free money (less than inflation) to borrow and the return is well over what you're getting in fund, I say why not? But I'm no CPA, so take it with a grain of salt.
- Woodbridge, VA · Member since 2015 · 44 posts · 7 votes10y
And learn what you're doing first. Gold flees those that invest in ventures they have no skill in.
- Investor · Waltham, MA · Member since 2016 · 7 posts · 1 vote10y
My main goal right now is to buy and hold rental properties until I'm receiving $20,000/m and I'd quit my full time job to manage my properties and continue to build my RE empire.
In 2011 I borrowed from my 401k to purchase my first home(single fam). I have since repayed the loan, sold that house, and bought my first 3 fam in Dorchester. One thing that was pointed out to me as a concern was that while i had a loan out on my 401k, my investments in my 401k (stocks or mutual funds or whatever) could not earn interest/dividends. Thoughts on this? No biggy assuming I would make more on my RE prop than the dividends from 401k? anyways, i felt pressure to pay it back ASAP after hearing that.
Currently I am looking to purchase my second three family without borrowing from any investments. I do appreciate the idea @Sunny D. about the 401k being effortless(def rings true) and that you can take the 401k out 5% per year with minimal penalties; thank you.
- Pleasanton, CA · Member since 2015 · 246 posts · 115 votes10y
Originally posted by @Adam Wells:
My main goal right now is to buy and hold rental properties until I'm receiving $20,000/m and I'd quit my full time job to manage my properties and continue to build my RE empire.
In 2011 I borrowed from my 401k to purchase my first home(single fam). I have since repayed the loan, sold that house, and bought my first 3 fam in Dorchester. One thing that was pointed out to me as a concern was that while i had a loan out on my 401k, my investments in my 401k (stocks or mutual funds or whatever) could not earn interest/dividends. Thoughts on this? No biggy assuming I would make more on my RE prop than the dividends from 401k? anyways, i felt pressure to pay it back ASAP after hearing that.
Currently I am looking to purchase my second three family without borrowing from any investments. I do appreciate the idea @Sunny D. about the 401k being effortless(def rings true) and that you can take the 401k out 5% per year with minimal penalties; thank you.
Main issues with borrowing money from a 401k
In most plans your investments got sold prorated to fund the loan and your account balance reduces by loan amount. Its true that your investment appreciation potential gets reduced as a result and you will miss out on any gains.
You will be paying back interest which is with after tax money into a tax deferred account. This impact is usually relatively very marginal since even if you were to take a bank loan you have to pay back with after tax dollars.
401k loan is inferior to HELOC where you can potentially deduct interest upto 100K of credit used.
The biggest behavior change from 401k plan borrowers is that most of them stop contributing same amount as before as they also have to pay back loan interest. Since, they typically use the loan amount for other purposes the cash reduction in-pocket usually results in reduced 401k contributions. Once this discipline breaks, hard to fix it and folks usually keep dipping into 401k loans more.
Looks like you have taken a loan before, repaid it and also have experience profiting from real estate. So I guess it may work out well for you.
- 10yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
@Kitty Jedra. Although investing in a rental/cash flow property is the way to go especially in these markets, it is probably not great idea paying the exogenous fees to withdrew money from your 401k before retirement. I have heard people taking loans out based on their 401k balance. That may be more prudent and can potentially use that cash for your down payment.
MoFin Lending4.9152 Reviews - Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes10y
@Kitty Jedra I think everyone has laid out the options for you, but depending on your situation, some options are available and some are not.
For example, the loan option, which is borrowing from a 401k, is only available if you are still working for the same employer. And even then, you will need to check with your plan administrator to see if the 401k allows borrowing. This can help you get some cash for the downpayment or rehab cost, for example. But keep in mind that the loan is limited to 50% of the account balance, you can only borrow up to $35,000 of the $70,000 that you have. With this option, you need to do the math and see whether you can afford the payments because the loan period is only 5 years or less.
The option of rolling over to a self directed IRA or Solo 401k can work only if you left your employer already. If you are still working for them, your plan needs to allow "in-service" distribution for you to be able to roll the money over to a different plan. With this option, you can invest in real estate, but keep in mind that the property belongs to the plan, not you personally. So you will need to keep it at arm's length. You cannot stay in the property, you cannot extend credit or commingle funds with the plan either.
The question of whether it would be wise to invest the money into real estate depends also on many factors. What are you investing in right now with your 401k? Would real estate offer a better return? One thing for sure is that it is not recommended to withdraw early from the 401k unless it is absolutely necessary. You will need to pay expensive tax and penalty before you earn any return. You can contribute to take advantage of the employer's matching contribution if any. When you leave the job, you can always rollover the money to a self directed account for real estate investment.
- Real Estate Agent · Los Angeles, CA · Member since 2015 · 149 posts · 75 votes10y
@Dmitriy Fomichenko @Sunny D. I'm going to piggyback. I'll be starting my first full-time job. Will be making a good salary in a low cost market and going to use that money to fund real estate activity. Do you have any insight regarding funding a 401k vs IRA vs just using that money towards RE now? I'm torally uneducated about retirement options.
- Humble, TX · Member since 2015 · 1 post · 1 vote10y
401k's are a scam. I WOULD NOT recommend withdrawing just because of the loss you will take in taxes and penalties, get a loan instead. They were originally meant as a supplement to Social Security and your company's pension. It is now sold as a primary means for retirement which is a crock because it is finite. Do a little research and you will be shocked at who all gets a share of your 401k. Aside from having to fund pensions, there are more benefits for your company to offer you a 401k. Try to find ALL the fees you're being charged even the unpublished hidden ones. If you saved $1M, retired at 65 and if you need 50K a year, you would be out of money at 85. But, who has $1M in their 401k? Not me. Its not a bad idea to contribute to maximize your company's contribution but look at it as a savings account not a retirement account. If you're within 7 years of retirement move it to an ultra safe fund like a government securities fund with little to no interest. Why 7 years? Market cycles. But please don't take my word for it, do your DD. The only true retirement is the infinite perpetual CASH FLOW from your business and/or a pension if you're lucky enough to have one. Just my $0.02.
- Pleasanton, CA · Member since 2015 · 246 posts · 115 votes10y
Originally posted by @Austin Mudd:
@Dmitriy Fomichenko @Sunny D. I'm going to piggyback. I'll be starting my first full-time job. Will be making a good salary in a low cost market and going to use that money to fund real estate activity. Do you have any insight regarding funding a 401k vs IRA vs just using that money towards RE now? I'm torally uneducated about retirement options.
Austin
My view is fund 401k always and then save up to do RE as well. If your tax bracket is low, when markets have a correction, consider some contribution to a roth 401k else traditional 401k is ok.
Cheers
- Investor · Charlestown, NH · Member since 2016 · 48 posts · 15 votes10y
I am not a CPA but borrowing on your 401k is one way to get your down payment for real estate.
My question is when you pay back your loan, are you doing it with taxed income. And when you take it out in retirement you will pay tax again, This sounds like paying tax on the money twice.
I would like to hear anyone's opinion on this issue.
A self directed IRA is the way to go for real estate investing. I have done this and wish I had saved more in my younger years.
- Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes10y
Because retirement accounts are tax shelter vehicles which means all gains grow tax deferred, or in the case of Roth funds--whether Roth 401k or Roth IRA funds--tax free until qualified distributions commence, in my opinion it is tough comparison to compare whether a 401k should be cashed out to invest in real estate.
I also fully understand that one may not have any other means of tapping funds to invest in real estate that results in immediate cash flow since retirement account funds are not generally used for this purpose.
However, one option is to use your retirement funds to finance a real-estate operating company. The use of retirement funds to finance a real estate operating company is commonly referred to as a ROBS 401k because it will not subject your 401k to taxes or early distribution penalties since you are investing retirement funds in your own business. Here are some of the rules that apply to a real estate operating company when investing via a ROBS 401k.
Your exiting 401k funds would be processed as a direct rollover to a new 401k sponsored by your new C-Corporation real-estate operating company. The operating company rules in connection with real estate must be satisfied so make sure to work with competent compliance professionals if you decide to pursue the use of 401k rollover funds to finance a start up. To give you an idea of the requirements, at least half of the Corporation’s assets would need to be invested in real estate that is directly managed or developed by the Corporation.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes10y
You CAN buy real estate in your self directed IRA, self directed ROTH Ira would be even better, and if you qualify for a Solo 401K that could also be either traditional or Roth and in all of those choices you can buy real estate, either tax deferred or tax free forever!
- 10yThomas RutkowskiPro MemberFinancial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
Get your money out of the 401k and into a self-directed IRA. The fees in 401k plans are outrageous. You have the fees of the underlying mutual funds plus the administrative fees and commissions for the brokers who sold and manage the plan.
For those of you currently employed: fund a 401k plan only up to the limit that will be matched by your employer and no more.
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