Pulling 401k early to invest in real estate?

Question

So I just opened my business a year ago, before I opened up I worked for a business and was putting money in my 401k.  Since I left the company I worked for, I never moved my money out of the 401k, and never put money into it.  Because I want to get into real estate investing in doubles, I kinda want to pull out my 401k, which I know will take a 10% hit for taking it out early, and I will have to pay taxes on the amount, but I think it would be better off being used to invest in real estate, it would be less risky in my eyes, not sure how other people feel about this.

I want to get into real estate investing, I want to buy a double as soon as I can, but being a new business, taking advantage of all the tax right offs I can, looks like I am making less money than when I worked for the company I left.  I just finished my first full year operating, and I did well, I have more money in the bank than ever before but I also look like I made a lot less.  So not sure if I will be able to get a mortgage because of this, or if money in the bank will help?

George Blower · Answer

@John Gach

It appears that you are eligible to open a solo 401k plan for investing in real estate.  The former employer funds can also be transferred to the solo 401k. In addition, if you don't have enough funds in the solo 401k plan to make the purchase, the solo 401k can obtain a non-recourse loan from a third-party lender.

Joseph Salegna · Answer

@John Gach Have you considered opening a Self Directed IRA or Solo 401k? You could roll over the 401k into one of these products and avoid the 10% penalty? There are plenty of providers on BP that could help.

William W. Humphrey · Answer

Some 401(k) plans allow for an "in-service" distribution.  This means the participant, while remaining employed by the company, can roll over a portion of the money in the 401(k) without tax or penalty.  Ask the plan administrator or trustee to see if the plan document has this provision in it.

Justin Windham · Answer

@John Gach

I agree with others, you can likely benefit from a Solo 401k plan. The right plan can help you save on taxes and invest your retirement funds into real estate. There are many low cost options and several providers have posted here. I'd recommend reaching out to a few to learn more about the various offerings.

Michael Craig · Answer

@John Gach great thinking outside the box but avoid penalties! One thing to look into is are you able to take a loan against your 401k? Usually, taking a 401k loan has no penalties, no tax implications and the interest you pay goes right into your 401k account.

Carl Fischer · Answer

@John Gach

I agree with the other responses. Its very tempting to take the retirement funds out of a 401(k) and take the hit, but there are other options. I think @George Blower offered one solution with many advantages. Depending on how your business is set up and if you have employees or plan to, you might be eligible for for the solo401(k). Do a little research, perhaps this type of 401(k) will allow you to start your real estate investing career without having to take the penalty and tax hit.

Basit Siddiqi · Answer

@John GachCongrats on making the switch from working for an employer to being your own boss.It doesn't make sense that you have more cash in the bank than ever but have a thought that it will look like you made less. Are the financials done for your business for the 2018 year?What does the net income say?One other concern is that since you have your own business and more cash than ever. Have you been making estimated tax payments?Now that you work for yourself, you need to make estimated tax payments based on the income that you earn. Otherwise, you risk being subject to estimated tax penalties.Have you also talked with a lender to see how much you qualify to borrow?What is the estimated costs of the duplex that you plan to purchase?I would look first to see if you can create a solo401K and then transfer the funds from your 401K over to the solo401K. You may be eligible to borrow against the 401K or purchase real estate directly with that solo401K account.

Pulling 401k early to invest in real estate?

Most Popular Reply