Thoughts on Cashing out my 401k
Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
Thoughts on Cashing out my 401k
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes@Tucker Cummings
If you want to take the 401k contribution, you should have taken it out in 2020 where they were removing the 10% penalty if you were impacted by covid.
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42 Replies
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes5y
Ultimately you have to run the numbers and see if returns that you can generate would be worth paying penalties for early distributions and taxes. It looks that you've done your homework on the investment return, now talk to your CPA about what it will cost you to pull these funds out.
You should still continue to contribute to your 401k up to the match, you are getting immediate 100% return and it would be foolish not to take advantage of that.
- Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes5y
"I'm wrestling with cashing out my 401k and I'm wondering if this is something I should do with mine and my wife's 401k."
TALK WITH A CPA BEFORE YOU DO ANYTHING. Taxes can easily eat up 30%-40% of what you take out before retirement.
Its not the same (since it's an employer plan) as a IRA, but with a IRA you can do self-direct (SDIRA) to invest in properties without a tax hit, but you need to follow the rules exactly.
- 5yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Tucker Cummings
If you want to take the 401k contribution, you should have taken it out in 2020 where they were removing the 10% penalty if you were impacted by covid.Basit Siddiqi CPA4.979 Reviews - Investor · Baltimore, MD · Member since 2019 · 168 posts · 47 votes5y
As previously suggested, I would continue to contribute all funds to get an employer match. In addition, instead of withdrawal, why not do a 401K rollover into an IRA which is tax free. Certain IRAS allow you to purchase real estate! So you can do what you want without cashing out & paying taxes.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
@Basit Siddiqi but I didn't, and its not 2020 anymore, so thank you for the shoulda, coulda, woulda. If you have some useful suggestions for 2021, that are forward looking, not retrospective, I'd be open to hearing those.
@Arthur Schwartz I've heard of this tactic. Maybe that's what I need to discuss with my CPA. Ultimately I just feel like its money/equity that's just sitting there, not being utilized to it's highest potential.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
@Dmitriy Fomichenko Definitely still going to contribute. From what I understand, I can get the 100% immediate return and then if I immediately pulled it out and took the ~20% taxes and 10% penalty, I'd still net a 70% return.
The real question is my wife's 401k, which we contribute 10% of her paycheck. She doesn't get any matches at all. So I'm thinking the wiser option might be to stop contributing so we can invest that money into real estate. Idk, it's a real humdinger to go against what I've always been told to do... but just because it's popular doesn't mean it's right.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Tucker Cummings you throw around the word "easily" way too much. Your overconfidence will be your downfall. Another option is to invest in real estate within your retirement account.
- Member since 2020 · 437 posts · 675 votes5y
@Tucker Cummings
401k cash out is to me like going to the lender of last resort where you kill your retirement fund and pay a penalty to do so. To that is very expensive capital especially if you consider the tax free compounding of 401k funds overtime. You say you can “easily” make money back in RE. What gives you that confidence? Prior track record or something else. If there is confidence why not just borrow money from the market at higher rates and best that cost of capital through your RE investments.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
@Joe Splitrock & @Justin Thorpe
Thank you both for the gut check, I apologize and I should check my language before writing. I guess by "easily", I mean when you take into account cash flow in my area, debt paydown, appreciation and tax benefits, it doesn't really seem like capital appreciation investments compare in any way to real estate.
My experience so far is what gives me some confidence. I acknowledge I'm new and that I've only done three deals. One was the MLS where I wasn't looking for a good deal, just something to get in the game and I'm running a 35% return on cash flow alone, the second was a BRRRR where I pulled about 7k out more than I invested, the third is a BRRRR deal where I used delayed financing to net even (you can't pull out more than you put into a delayed finance deal, but I would have been able to pull money out had that been an option). I'm just thinking that if I'm doing this well with limited experience, what could I do if I leaned it more?
If I pulled out the 401k, I'd probably just do another MLS deal with 20% down. So for example, I pull out $28,571 and pay the 30% taxes and penalties to net $20,000. Use the $20,000 as a down payment on a $100,000 house. My market I can get about $500/month cash flow (this value takes into account capex, maint., PM, vacancy) on that, so $6,000 for the year. From just cash flow perspective, that's a 21% return. Add the $100/month in debt paydown so we rise to $7,200 or a 25% return. Add 2.5% appreciation, we rise to $9,700 or a 34% return. Then we have tax benefits, which I'm not capable of predicting, but perhaps the tax benefits of 401k compounding compared to what you can find through REI, so maybe they net each other out.
The alternative is $28,571 stays in the 401k, averages 8% and I get $30,856.
Break it out over a few years:
401k: Year 0 - $28,571 | Year 1 - $30,856 | Year 2 - $33,325 | Year 3 - $35,991
REI: Year 0 - $28,571 | Year 1 - $20,000 | Year 2 - $29,700 | Year 3 - $39,400
I'm not trying to be overconfident or arrogant... otherwise I wouldn't bother asking for advice on the forums. I apologize for my arrogance in the OP.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes5y
@Tucker Cummings Hi Tucker! I would not take the 70K out. How much do you and your wife have for a potential down payment? You guys are young. Forget about your 401K and allow it to keep marinating. Save your cash with your wife and invest with that $. You will be thankful in the future :)
- Rental Property Investor · Boston, MA · Member since 2019 · 124 posts · 121 votes5y
Originally posted by @Tucker Cummings:
@Basit Siddiqi but I didn't, and its not 2020 anymore, so thank you for the shoulda, coulda, woulda. If you have some useful suggestions for 2021, that are forward looking, not retrospective, I'd be open to hearing those.
@Arthur Schwartz I've heard of this tactic. Maybe that's what I need to discuss with my CPA. Ultimately I just feel like its money/equity that's just sitting there, not being utilized to it's highest potential.
I don't think its a good idea to drain your 401k to have it sit there, worthless, while you wait to find a deal. It would actually be losing value due to inflation. I don't think it's a good idea to touch at all. But if you do, A smarter way to do it would be to call CPA, the investment co that holds your 401k, and learn closely the process to do a withdrawal, if you even are allowed. Then while you learn more and look for deals, if you need more $ for downpayment etc then you could draw upon the 401k for the downpayment. Usually it only takes a week or two to get the $ but will vary. but a A heads up saw someone mention rollover IRA, you can't move 401k money into a rollover IRA until you no longer work at the employer. You need to leave the firm, wait a few weeks for the plan to go from active status to inactive status, then you can roll the funds if you want.
Assuming you both still work at the firm your 401k's are at, you'd need to see if this cashout is even an option. Each company sets its own plan rules. Some don't allow any cash out. Some allow a certain amount. Some allow a full cashout. You'd need to see if the idea you have is even allowed.
Also the employer match portion usually vests over a period of time. So you may not be entitled to some or all of the matched portion if you were to drain the account. You need to get some calls into your CPA and also the employer sponsored retirement plan division of the firm that your company uses for your 401k401k LOAN is always an option however this would affect your DTI as you'd be paying installments back into your plan to pay back the loan
Best of luck!
- Investor · Baltimore, MD · Member since 2019 · 168 posts · 47 votes5y
Information posted about a roll over from 401K only after termination, is wrong. I rolled a portion of my 401K into a self directed IRA last year, and I'm employed by the same employer.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Tucker Cummings real estate does often return more, because it is not passive and has higher risk. I am a fan of having real estate and stock investments in a portfolio. Your 401K has protections from bankruptcy and divorce. I look at that as "old age money", so when you are in your 70's, 80's, 90's there is a pile of cash that can support things like assisted living. Even if something goes completely wrong with your real estate investment, you have that security blanket waiting.
I have to say, $500 cash flow after all those expenses on a $100K house seems high. What kind of market rents are you getting?
Also keep in mind your 401K satisfies reserve requirements to secure conventional financing. Every property you add will require more reserves for underwriting, so draining your 401K could create an issue.
The fact you have already done deals and have experience makes me less opposed to the idea of taking 401K money. Good luck.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
@Joe Splitrock thanks for the advice. I think considering all things I'm leaning more towards leaving my 401k as is (which is a change of mind from the start of this post), but I'm still going to talk to my CPA about options.
I invest in Fayetteville, NC, near Ft Bragg and rent by the room to soldiers, all on the same lease. My gross rent on the MLS property is $1250/month. Property was $100k purchase price, mortgage is $534 and I budget 10% for PM ($125), 10% for combined capex + maintenance ($125), 5% mortgage for vacancy ($26). So that puts me at $440 projected cash flow. In reality, the property has cash flowed at $500. I'm sure there will be future expenses that might knock me down closer to the projection. However, only 2 of my 3 rooms in that house are rented at the moment and I'm hoping to get the third room filled when the lease renewal comes around in April, which should raise my gross to closer to $1500-$1600/month.
- New Bern, NC · Member since 2017 · 246 posts · 173 votes5y
@Tucker Cummings
Hi Tucker. Can you take a loan out from your 401k? I have been able to take 50% of my 401k funds out in the form of a loan three different times to help me make down payments on property. There were no tax penalties or implications doing it that way. Then I have paid back those loans through payroll deductions. I don't know if all 401k plans have that option, though, or if it's something you're open to.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
@Patricia Taveras great suggestion. I was just speaking to someone else who expressed this might be an option to explore. I'm not sure if I can do it on mine, but I will definitely be looking into it more.
- 5yBob NortonPro MemberAccountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
@Tucker Cummings Think of your 401k as part of your diversification strategy. I've always regretting cashing out my 401k when I was younger. I would have rolled it into a self-directed IRA at some point. So, I would recommend keeping the funds in your 401ks until you leave your employer, then roll them into a self-directed IRA. Some employers allow in-service distributions, as @Arthur Schwartz mentioned; however, most do not.
I would suggest that you continue to contribute to your 401k up to the match, then set aside extra funds to build a real estate purchasing fund. Since you wife does not get a match, she could stop contributing to her 401k and instead set aside those funds for your real estate investing fund.
If your 401k has a Roth option, I'd recommend switching your contributions to the Roth. You don't get a tax break with the Roth; however, the earnings are tax-free forever. Right now we are experiencing some of the lowest tax rates in US history, which are scheduled to go up in 2026. In addition, you are in a lower tax bracket right now than you will be in retirement (real estate investors' incomes do not decrease in retirement, so required minimum distributions from a traditional IRA may kick you into an even higher tax bracket). So, with a pre-tax deduction, you are saving lower taxes now and will be paying higher taxes in the future.
Good luck!
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
@Bob Norton that's great. Thank for the very clear and planned advice. That's exactly what I was looking for!
- Accountant · Tulsa, OK · Member since 2018 · 312 posts · 349 votes5y
@Tucker Cummings in reading your initial post it sounds like both you and your wife are still employed with the companies that run these 401k's. If that's the case then it is highly unlikely that you will be able to take a distribution from them, as 401k plans only allow distributions for "distributable events". Typically these events are retirement/no longer working for that employer, death, disability, or reaching retirement age (usually 62). Some plans do allow for early withdrawals for those age 59 1/2 or older, but that still doesn't help you. Additionally, there are hardship distributions which, if your plan allows for them, might help you if you were looking to buy a home you were going to live in (one type of hardship allows for you to take distributions for downpayment of primary residence) but it sounds like you're looking to buy an investment property, not a primary residence. You're best bet for getting money out of your 401k and into real estate would be to take a loan instead, however you need to check with your HR rep to see if your plan allows for loans as many plans don't. With a 401k loan you don't pay any taxes (unless the loan isn't repaid before you quit/retire/leave, then it converts to a distribution which gets taxed) and any interest on the loan is interest you are paying yourself as it goes back into your 401k. The downside is that most loan lives are capped at 5-years to repay, though occasionally a plan will allow loans for primary residences that are extended to 15-year repayments. Good luck with your real estate journey!
- Member since 2020 · 9 posts · 1 vote5y
@Tucker Cummings 
A good investment portfolio is a diversified portfolio. Keep your 401(k)’s running. This may not be the best time for you to invest in real estate since your 401k is your only means. 
- Member since 2020 · 3 posts · 1 vote5yDo not touch your 401K. That is a terrible idea. Absolutely horrible idea. Let me say this again. Do not touch your 401. To the contrary, increase your contributions every month. If you need to raid your 401 to invest in real estate, you should not be investing in real estate. Leave the 70K as is and continue to contribute monthly. You guys are still very young. With regular contributions over the next 40 years, when you and your wife retire that 401k will be worth millions!
- Investor · Union City, NJ · Member since 2019 · 32 posts · 7 votes5y
@Tucker Cummings if you’re confident in your returns and know your market you can make more in real estate than stocks in most years. Growth stocks did return ~40% in 2020 though.
Your wife taking a loan on 401k may be a good option if returns exceed cost of borrowing. There you have a tax free down payment and wife can pay back loan thru payroll deductions into 401k.
Long-term if she isn’t receiving match you can decrease her contribution, and it’ll slowly payback the loan you took for the down payment.
- 5yDan DiFilippoBusiness MemberReal Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
You've had a few flavors of replies here and they all seem pretty good and well-informed. And, by the way, you can always reach out to me directly to discuss. I'm always happy to chat with a team client when it comes to this kind of stuff.
What I would give special consideration to is your risk profile. While I think real estate is an *excellent* investment, you should probably consider what your desired allocations look like. Because just like people talk about diversifying your equities portfolio, the same principles 100% apply to everything you own that has saleable value.
Getting into that theory a little bit, if you owned 100 doors or 0 doors, I don't think you'd be asking this on here (not that you shouldn't be asking). If you owned 0 doors, you'd probably be content to keep about ten times that amount in your 401k. And if you had 0 doors, you'd probably have liquidated it already, eager to get yourself invested in real estate. It comes down to portfolio construction and what makes your comfortable. Consider as well, what risks your 401k is exposed to, regarding what specific investments are within it. Then consider what risks your real estate investments expose you to.
A major risk to consider, one that is largely unique to real estate, is the use of leverage for what is a fairly illiquid asset. In essence, if the housing market sours and you have this pall of debt hanging over you while your gross rents drop by 30%, is your 401k also suffering, or is it allocated more heavily to assets that will perform well under these circumstances?
For better or worse, real estate as an asset class (and, yes, real estate is a very broad asset class with several subclasses), is becoming less *anti*correlated to the equities market and instead becoming more *non*correlated to it. That is to say, real estate used to perform well when equities would fail; more recently, though it's just been sort of doing its own thing. - 5yKhaled El DorryPro MemberCasselberry, FL · Member since 2016 · 111 posts · 54 votes
@Tucker Cummings I took my 401K and rolled it into a self directed IRA in March when Covid hit the stock market hard and it was very simple. However that was my ex employer who I don't work with anymore and haven't in 3+ years. I don't know if you can do the same with current employer 401K or not but I do know there are a lot of people who use their IRA's (and I may as well) to invest in real estate. Good luck!!
- Wholesaler · Sanford, NC · Member since 2019 · 1 post · 0 votes5y
@Tucker Cummings
I would not take any 401k contributions.
If you want to continue doing deals using the brrr strategy is amazing.
I would instead look into using private money or even hard money lenders!
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