Thoughts on Cashing out my 401k

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Thoughts on Cashing out my 401k

Tucker Cummings
Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes

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. The purpose would be to push it into real estate. Total we have about 70k in our collective 401k. I'm 28 y/o, she is 30 y/o.  

My employer gives a 100% match up to 6% and I max that out at 6%. Her employer does not give a match and we contribute 10% of her pay to the 401k. Overall I'm looking at stocks/401k and we can see a YoY 8%ish return in the stock market for stock funds. But I know I can go buy a deal off the MLS and easily get 30% returns in just cash flow. If I'm doing an off market deal, the returns are even better.

At face value, I'll pay the 30% in taxes and penalties and easily make it back in real estate. So I want to do it, but I'm just wondering if I'm overlooking anything or if this is a bad idea. Just right now the way I see it, I have 70k just sitting there that I can't leverage.

Any recommendations or experiences?

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
5y

@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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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    5y

    Too many stocks out there that will beat the pants off run of the mill rentals. Your employers 6% matching is 50% of that alone and risk free. Unless you have a real well thought out plan to execute and that might require a ton of work, time, expense and a decent amount of seruously high risk I would remain in your 401k until such time.  Good luck! 

    1Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Tucker Cummings

    No dog in this fight and it’s your money but it’s seems like you want to compare historical stock price (S&P) returns to the most recent returns you are seeing on your RE investments.

    That may be ok but recent returns on equities have been way north of 8%. I know of people who have done 80 - 120% returns in 2020. Hopefully that does not mean the liquidate their RE holdings and put that cash into the stock market.

    Personally I view 401k as a very separate investment vehicle compared to RE. It’s best not to compare them. Ideally you want to have both from a diversification standpoint.

    2Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    5y

    @Tucker Cummings

    I will suggest you talk to your CPA or do a 1hr consultation with one.

    Goodluck

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  • Guido Nunez
    Investor · Los Angeles, CA · Member since 2019 · 38 posts · 22 votes
    5y

    @Tucker Cummings I am never a fan of pulling out from the 401(k) when it involves tax and penalty. I’d rather find the property and an equity partner, or private lender. Also ask your 401k provider if you can take a loan against your 401k.

    0Reply
  • Luis Savery
    Rental Property Investor · New York, NY · Member since 2020 · 51 posts · 28 votes
    5y

    Some people advise against this, like Dave Ramsey says "don't borrow against your future". In my opinion if it makes sense for your initial property its ok as long as you have a gameplay to pay it back quick. 

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  • Account Closed
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    5y

    @Tucker Cummings some 401k plans allow you to borrow against them up to a certain percentage without paying a penalty or tax on the borrowed funds. This loan isn't reported to the credit bureau so it doesn't affect your DTI and you will have to pay YOURSELF interest on the funds borrowed in repayment.

    I’ve done this twice and it worked out perfectly for me. It allowed me to leverage myself dramatically faster to get started. Risk/Reward is on you.

    0Reply
  • Cory WallacePro Member
    Rental Property Investor · Norfolk, VA · Member since 2020 · 53 posts · 38 votes
    5y

    @Tucker Cummings My two cents....if you generate enough passive income to cover your expenses you are financially free. Do you really need a 401K if you are actively working now to build financial freedom?

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  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    5y

    @Tucker Cummings Tucker! This is an easy one. No need to cash out your 401k. 

    I'd say for a duplex or small multifamily (2-4 units) in your area and you and your wife move into a unit and rent the other one. 

    Now, you may ask: why do this? 

    First, you won't need to empty your 401k. 

    Second, you can purchase a small multifamily property with 3.5% downpayment so you won't need the whole 70k

    Third, you continue to max out the 6% match from your employer to grow the nest egg (trust me - having extra money is always a good thing)

    Lastly, you now have an asset paying you monthly so you and your wife can bank some money since you are getting rent, so you both plan to buy your second small multifamily. Rinse and repeat! 

    0Reply
  • Michael Jones
    Investor · Louisville, KY · Member since 2017 · 199 posts · 253 votes
    5y

    I cashed out my 401k, took the penalty and walked away with 90K liquid. I used it for a down payment on a four plex. Waited six months with profit building and the remaining portion of the original 90K and bought a second four plex. After a year I refinanced both four plexus and was able to pull out around $100k in refi money. I used this to pay the down payment on two more four plexus leaving me with a total of four. The third year I rinsed and repeated and pulled more cash out by refi of the last two and bought two more buildings. 

    I know have 28 total doors spread over six buildings and five years since I cashed out my 401k. I profit more per year than I had in 401k when I cashed it out. 

    I'm not a CPA, financial expert, stock market broker or even highly educated but I can tell you that there was no chance I would be pulling six figures a year profit from my 401k today if I had left it sitting.

    That is the success story side of the coin. Here is the ugly side:

    I know more about bed bugs than I ever cared to know. I keep rubber gloves stocked up for peoples toilets when they clog and it saves me $150 drain call. I keep hot water heater burner assembly kits in my truck in case I get the "my hot water heater isn't working" call. I can go on and on. 

    The point is that yes you can cash out your 401k and turn it into better money. But I promise you it will not be easy. It will be sleepless nights and hard work and cleaning up other peoples messes and your own mistakes as you learn how to manage the business of tenants. 

    The hard work will pay off if you are willing to do the hard work and learn to read people and treat people the way you want to be treated without letting your business suffer.

    But cash out your 401k and treat people poorly including tenants, outsource all of the dirty work to vendors and property management companies  and you will have a better chance at the nearest casino.

    Good luck and I sincerely wish you the best.

    2Reply
  • Robert Burris
    Rental Property Investor · Wichita, KS · Member since 2016 · 64 posts · 29 votes
    5y

    @Tucker Cummings im not a fan of cashing out and giving money away. It may be a good option but there are alot of other ways. I can get 1 loan a year on my 401k. I can only have 1 loan at a time so I borrow invest and pay it off before the end of the year. That way I pay myself the interest.

    0Reply
  • Account Closed
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 176 posts · 169 votes
    5y

    You can "Just go buy off the MLS for a 30% return in just cashflow"

    Where? Can I buy the whole city? 

    0Reply
  • Mitchlyn D.
    Rental Property Investor · Jacksonville, FL · Member since 2015 · 342 posts · 142 votes
    5y

    @Tucker Cummings I took a loan out of my 401K for a down payment of $10K on a duplex. I didn’t cash all out nonetheless. So just an FYI as another option.

    Also, you mentioned only made 8% last year on your 401K. I made about 30% return in 2020. Not sure how your diversified but check to see if you can research and possibly find a fund(s) with better returns (I’m not a financial advisor by the way).

    1Reply
  • Tucker Cummings
    OP
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    5y
    Originally posted by @Michael Jones:

    I cashed out my 401k, took the penalty and walked away with 90K liquid. I used it for a down payment on a four plex. Waited six months with profit building and the remaining portion of the original 90K and bought a second four plex. After a year I refinanced both four plexus and was able to pull out around $100k in refi money. I used this to pay the down payment on two more four plexus leaving me with a total of four. The third year I rinsed and repeated and pulled more cash out by refi of the last two and bought two more buildings. 

    I know have 28 total doors spread over six buildings and five years since I cashed out my 401k. I profit more per year than I had in 401k when I cashed it out. 

    I'm not a CPA, financial expert, stock market broker or even highly educated but I can tell you that there was no chance I would be pulling six figures a year profit from my 401k today if I had left it sitting.

    That is the success story side of the coin. Here is the ugly side:

    I know more about bed bugs than I ever cared to know. I keep rubber gloves stocked up for peoples toilets when they clog and it saves me $150 drain call. I keep hot water heater burner assembly kits in my truck in case I get the "my hot water heater isn't working" call. I can go on and on. 

    The point is that yes you can cash out your 401k and turn it into better money. But I promise you it will not be easy. It will be sleepless nights and hard work and cleaning up other peoples messes and your own mistakes as you learn how to manage the business of tenants. 

    The hard work will pay off if you are willing to do the hard work and learn to read people and treat people the way you want to be treated without letting your business suffer.

    But cash out your 401k and treat people poorly including tenants, outsource all of the dirty work to vendors and property management companies  and you will have a better chance at the nearest casino.

    Good luck and I sincerely wish you the best.

    This is the methodology and track that I was thinking. I've already done 3 deals by saving up my cash, rinsing and repeating (BRRRR method). I've got the team to make it happen, made of people much smarter than myself. The main difference between you and I might be that I'm using a property manager to take care of bed bugs and toilets, which goes against your final point about having better luck at a casino. My PM has been amazing, and she is an investor herself with a fantastic reputation. Perhaps there was a bad experience fueling that point you made.

    Either way, the whole purpose of doing this and exploring this option is not to escape hard work. I want to free up my 9 hours of work/day that I'm paying to the man so that I can focus on building a business. Whether that's in real estate, buying a business outside RE, building an entirely new business of my own, or some other path is yet to be seen. But either way it goes, I know there is a lot of hard work ahead of me. 
     

    0Reply
  • Tucker Cummings
    OP
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    5y
    Originally posted by @Mitchlyn D.:

    @Tucker Cummings I took a loan out of my 401K for a down payment of $10K on a duplex. I didn’t cash all out nonetheless. So just an FYI as another option.

    Also, you mentioned only made 8% last year on your 401K. I made about 30% return in 2020. Not sure how your diversified but check to see if you can research and possibly find a fund(s) with better returns (I’m not a financial advisor by the way).

    Mine also gave my wife and I about 30% returns as well, but if we look at the stock market across the long term, 8(ish)% tends to be the market return. It may have been 30% this year, but next year could be 2%, could be negative, could be 100%, who knows. 

    I guess when I look at stocks vs. RE (and I have 3 properties right now), its really like comparing capital appreciation to capital producing. And I just need to ask myself "do I want to put my capital in something that will appreciate, or do I want to put my capital into something that would produce capital"

    I started thinking about this a lot lately, especially with the rise of bitcoin and the fall of the dollar. Who knows, maybe one day instead of exchanging dollars for rent, we'll exchange bitcoin/crypto or stocks in exchange for rent. That's just theory I'm running in my head, and I don't have any cypto at the moment. But if crap hits the fan, I think there's a lot of value in having something that produces capital (whether cash, crypto or stock) vs. capital itself.

    0Reply
  • Mitchlyn D.
    Rental Property Investor · Jacksonville, FL · Member since 2015 · 342 posts · 142 votes
    5y

    @Tucker Cummings Gotcha! Yeah, Bitcoin is very enticing with all the returns I’m reading.

    But I totally understand what your trying to achieve.

    0Reply
  • Mark Kelley
    Investor · Raleigh, NC · Member since 2016 · 82 posts · 34 votes
    5y

    Lots of good perspective above. I’m personally of the discipline that a well funded 401k is good to have alongside RE and other investments, and that tapping into a retirement account for anything is last resort.

    In my personal judgement and with only the limited info I have about your situation, I would aim to max out the pretax savings in the 401k. For both you and wife. That would be $19,500 per person per year pretax. Do this alongside RE investment like your doing now. Let’s say you end up keeping the W2 for the next five years while building out the RE business, you’ll have likely banked a chunk of change in a tax deferred account without much effort or thought with decades more for it to compound.


    - mwk


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  • Suzette T.
    Rental Property Investor · Acadiana / South Louisiana · Member since 2019 · 115 posts · 49 votes
    5y

    Hey Tucker!

    So of course, CPA should be consulted, etc

    We were able to use $10k of our IRA as a down payment for first time home buying and that from what I understood, carried less fees. I think one qualifies as a first time homebuyer every three years, again, please look into this as I'm no expert.

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