Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
Thinking on withdraw most of my 401K account (no longer employed with that company) and invest in RE property. I have over 100K, also have lost over 10K in the past 13 months. Just want to have more control of my money and invest in something I'm sure will get at least 6% invest return on the long haul, if not more. What are my options? Get tax penalty and move on? I have heard about Self IRAs but not sure how that will work on my situation. I I'm paying my primary residence and this is merely an investment "switch" from my 401K. The properties that I'm looking, after all the expenses, give me cash flow of $50/month, maybe less not counting on taxes for the rent income... Any help?
@Josue Vargas I withdrew my 401k to invest in RE. After taxes and fees i ended up with about $40k. With that money bought a BRRRR last year, refinanced and took that money back out an I'm currently using it on me second BRRRR that should me completed in about a month. When all is said and done, I'll have $300k in real estate, $500/mo in cashflow, and about $80k in equity. And in April, I'll have my $40k back in my bank account.
I had considered the same thing, even before the market started going down. It's not something I feel totally comfortable doing, so I'm keeping my money where it's at. I look at it as another stream of income when I retire.
Moving funds from former employer's 401k to a rollover IRA or SDIRA is a no brainer. And either type of account would go a long way to giving you control.
Cashing out takes more thought when IRS will take a 10% penalty plus 25-35% in taxes leaving you with a lot less than you have now.
We're I in your shoes, I would move but I would not cash out.
I have to agree with @Karen O. That the penalty and tax hit would be a significant loss. I would be happy to provide you with more general information on self-directed retirement accounts - they allow you to do exactly what you want!
What are your plans with this property you have lined up?
Do you plan to rent it out, and to who?
Do you plan to fix it up, and who is doing the labor?
How much do you expect the property to cost (purchase price +renovations)?
Does your 401(k) have enough to cover that?
Did you know your self-directed account can partner with other monies for a deal?
Did you know your self-directed account can obtain a non-recourse loan?
The reason for these questions is to find out if you plan on doing anything with your investment that would be considered prohibited by the IRS. If you plan to use the property strictly for an investment this might be a good way for you to have more control of your retirement investments and possibly make a higher return - the return is at your due diligence, a key part of self directed accounts is that the account holder (you) is responsible for investment choices. You must do all the due diligence to ensure you are making the best decision on what to invest in.
I have to agree with @Karen O. That the penalty and tax hit would be a significant loss. I would be happy to provide you with more general information on self-directed retirement accounts - they allow you to do exactly what you want!
What are your plans with this property you have lined up?
Do you plan to rent it out, and to who?
Do you plan to fix it up, and who is doing the labor?
How much do you expect the property to cost (purchase price +renovations)?
Does your 401(k) have enough to cover that?
Did you know your self-directed account can partner with other monies for a deal?
Did you know your self-directed account can obtain a non-recourse loan?
The reason for these questions is to find out if you plan on doing anything with your investment that would be considered prohibited by the IRS. If you plan to use the property strictly for an investment this might be a good way for you to have more control of your retirement investments and possibly make a higher return - the return is at your due diligence, a key part of self directed accounts is that the account holder (you) is responsible for investment choices. You must do all the due diligence to ensure you are making the best decision on what to invest in.
Carl,
1. Buy and hold (long term rent)
2. Not sure yet to who I will rent. It could be near an Air Force base (risk of turnover every two years or so but less upfront cost - lower mortgage) or near a very desirable location within the city limits (more likely professionals with high income but more expensive properties, better appreciation, and flexibility to sell fast if I want). I'm Inclining for the later.
3. No fix-upper. Looking at some properties with just minor work before rent it, something I could do myself.
4. Broad range, depends on the return of investment I can get. Between 150K to 250K.
5. Yes.
6 & 7. I am not planning to get a co-lateral in the loan.
If I move the 401K to a Self-direct IRA, then use that to purchase the investment property, will I still be hit with the 10% plus taxes after withdraw?
If you move to a self-directed 401k that will have the same restrictions about withdrawals as a "normal" 401k meaning that you can't take any distributions until you are 59 1/2 and, if it's not a ROTH 401k, you will pay taxes. So this would not be good if you are looking for immediate cash flow and are not over 59 1/2. Also, if you are considering buying real estate in a self-directed 401k please keep in mind that you do not get several of the important tax advantages such as being able to take depreciation or write off expenses against revenue. The rental house is just another asset like a dividend stock that will (hopefully) provide periodic income and long term appreciation.
If you gained $10K in the past 13-months, would you still consider withdrawing from your tax-deferred account to control your money? Think long-term.
I would look for more than $600 annual cash flow.
No, I would not be considering moving my money to RE, but the fact is I was getting less 7% return on investment when I was contributing to the plan, now things are not looking good on this particular plan (yes, on the short term perhaps). Since then I have changed jobs and I'm still contributing with my current company that matches 4%, which makes sense. I'm sure I can get way more than 8% on average on a RE investment on the very long haul (buy and hold). I know what most people say... do not count on appreciation. That may be true on some markets, but I strongly believe is not the case where I live.
I am just trying to make good decisions if I use part of my retirement 401K and switch to RE investment. I'm not considering taking a 40% hit on it, just looking for options.
If you move to a self-directed 401k that will have the same restrictions about withdrawals as a "normal" 401k meaning that you can't take any distributions until you are 59 1/2 and, if it's not a ROTH 401k, you will pay taxes. So this would not be good if you are looking for immediate cash flow and are not over 59 1/2. Also, if you are considering buying real estate in a self-directed 401k please keep in mind that you do not get several of the important tax advantages such as being able to take depreciation or write off expenses against revenue. The rental house is just another asset like a dividend stock that will (hopefully) provide periodic income and long term appreciation.
I made changes throughout my 401K, on average I should have about 40% Roth. Are there any plans or alternatives that allows me to move the 401K money to RE investment without major tax implications from the withdrawal?
I've been thinking about this as well, if I use a SDIRA to purchase a rental, how does the cash reserves work? Is it based off what's left over in the account, or would my personal accounts come into play?
Is it possible to take a loan from your plan? I don't know the rules once you are no longer employed with a company but I know 401k plans often do allow loans and variable terms for payback.
I think there is a quantity and total limit - like you can only take out 1 $50,000 loan at a time from your plan, maybe over the course of a year.
Checkbook IRAs are a thing - but keep in mind all the profits must remain within your retirement account.
Personally, with such a low cashflow number, I don't think I'd take a loan or the tax hit. I would consider it for a rehab project where I'm able to pay the loan back fairly quickly.
I've been thinking about this as well, if I use a SDIRA to purchase a rental, how does the cash reserves work? Is it based off what's left over in the account, or would my personal accounts come into play?
cash reserves HAVE to come out of the SDIRA
if you use personal accounts, that is a violation of the IRA terms and you are in deep doo doo with the IRS
Unless you're just wanting out of the broader stock market, rolling the former assets into your current employer's plan could be an option. By combining, you at least get everything in one place making it easier to manage and track.
Alternatively, if you aren't an accredited investor, setting up an SDIRA and lending to others may be the best way to invest in RE without triggering withdrawal taxes and penalties or becoming involved in prohibited transactions.
A sit down with a professional, like @Carl Fischer might also get you on the right track.
You have received a lot of input so far on this post. It is time to talk to your professionals and get what’s right for you. I would start as @Karen O. suggested with a SDIRA professional, doesn’t have to be me but thanks Karen for the vote of confidence, and your cpa who should know your financial position and goals. Together develop a plan that meets your objectives. It is achievable in several ways-you are just looking for the most efficient and cost effective approach.
You have received several recommendations here to look into a self-directed retirement plan. I would have to agree that seems to align very much with your goals.
If you were to withdraw from the 401(k), you would get hit with federal and state taxes, plus a 10% penalty for early distribution. That will make the recent 10% decline in value look small by comparison.
If you rollover the old 401(k) to a self-directed IRA, there are no taxes or penalties, you are simply changing the retirement plan format the funds are in. With a self-directed IRA, you can diversify out of the current volatility in the stock market and put that capital to work in something like rental property or mortgage notes where the principal is backed by a reasonably secure and stable asset that produces consistent cash flow. You can do a lot better than $50/month from a rental, however.
Several providers of self-directed plans are active here on Bigger Pockets. There are also a variety of plan formats with different costs and benefits depending on what you intend to invest in, such as having a 3rd party custodian be your processor or creating checkbook control. Do some reading and then get on the phone and speak with a few of us. There is a lot to learn, but it is certainly worth the effort if you can take more control of your savings.
And @Steve K. is spot on with his so beautifully described point about knowing the rules (thanks for the chuckle!). Such plans are purely a means to diversify the IRA and may not be mixed with personal funds or used to benefit you personally today.
@Josue Vargas have you considered talking a loan against your 401k instead? It’s really a loan to from yourself but most places only let you loan up to 50% of the account balance. This way you avoid all those penalties.
@Josue Vargas I withdrew my 401k to invest in RE. After taxes and fees i ended up with about $40k. With that money bought a BRRRR last year, refinanced and took that money back out an I'm currently using it on me second BRRRR that should me completed in about a month. When all is said and done, I'll have $300k in real estate, $500/mo in cashflow, and about $80k in equity. And in April, I'll have my $40k back in my bank account.
You have received several recommendations here to look into a self-directed retirement plan. I would have to agree that seems to align very much with your goals.
If you were to withdraw from the 401(k), you would get hit with federal and state taxes, plus a 10% penalty for early distribution. That will make the recent 10% decline in value look small by comparison.
If you rollover the old 401(k) to a self-directed IRA, there are no taxes or penalties, you are simply changing the retirement plan format the funds are in. With a self-directed IRA, you can diversify out of the current volatility in the stock market and put that capital to work in something like rental property or mortgage notes where the principal is backed by a reasonably secure and stable asset that produces consistent cash flow. You can do a lot better than $50/month from a rental, however.
Several providers of self-directed plans are active here on Bigger Pockets. There are also a variety of plan formats with different costs and benefits depending on what you intend to invest in, such as having a 3rd party custodian be your processor or creating checkbook control. Do some reading and then get on the phone and speak with a few of us. There is a lot to learn, but it is certainly worth the effort if you can take more control of your savings.
And @Steve K. is spot on with his so beautifully described point about knowing the rules (thanks for the chuckle!). Such plans are purely a means to diversify the IRA and may not be mixed with personal funds or used to benefit you personally today.
Thanks for the advice. As a note, I have about 40% on Roth in the plan. That said, I will be paying taxes on 60% of the 401K withdraw plus the 10% penalty. I'm currently in the 24% IRS bracket, so after all I will get hit with approx. 26% overall. I will explore options to move the 401K into a SDIRA and then figure out what can I do for investment in RE.
@Angel Perez The 401(k) that @Josue Vargas is referring to is from a former employer. A loan is no longer an option on that plan.
That is correct. I have two accounts with Vanguard, one from former employer and one with current employer. Can I move my former employer account to the current and then take a loan? What are usually the terms to pay-off the 401K loan?
Also, I have an ESOP with former employer that will start distributing on Apr this year, one payment each year for 5 years. I believe if I cash-out will get hit with the same penalties and taxes as 401K.
If you know what you are doing well enough to invest then yes. I did. Time will tell if that was a mistake or not. Thus far I have been vindicated by the fall in the stock market.
Take a loan from your 401k though, not a withdrawal. That way you don’t pay the penalties.
What I’m hearing in this forum is that I cannot take a loan against my former employer 401K where the bulk of the money is now. Wondering if I can transfer to current employer 401K account and then take a loan against it.