Rental Property Investor · NJ & NY · Member since 2019 · 31 posts · 6 votes
I have a 401k plan with an employer I no longer work for in 3 years. I want to use the funds for my second deal, but I don't want to pay the early withdraw fees, etc. What are my options?
I know I can't take a loan out since I no longer work there... Any recommendations on how to strategically use these funds? Transfer to a ROTH IRA, is an option I was looking into. I would appreciate any feedback and advise.
Gonna push back on Jaron's sensible post for a bit. It is a different situation if you are investing the money, instead of consuming it to get by then its a math problem. 401Ks etc. gather tax free and thats a powerful factor, but real estate CAN outperform if well done. And current use can be more valuable than future use.And if you can legitimately use the cares act you don't have a penalty and have a 3 year window to mitigate the tax hit. You can really jumpstart stuff using funds like that.
Don't be too sure you can't get a loan from your old employers account, or move it to one where you can. I am still doing loans from a 401K from an employer I left 8 years ago--it depends on the plan. Roth's are great, you do have the tax hit on making the transfer but no penalty.
The loans are so powerful...they helped us by our starter home, and we were able to use one to buy our first investment property which doubled in value. It doesn't show up on your DTI and you pay back the money to yourself.
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
5y
Do not use retirement funds to buy real estate. It's not just RISKY it's stupid. My friend pulled $20K out of his retirement because of the Cares Act. His reasoning was he needed money to stay afloat (while collecting unemployment) and keep food on the table. He resumed work 3 weeks later.
By doing so he effectively turned his future return of $200K into $20K because of COVID caused hard times. Instead of using an emergency fund he tacked on years of employment. Don't forget about the tax bill for the next 3 years. Don't be like my friend.
Save up for a property, find a deal, and do it the right way. You answered your own question by mentioning the Roth IRA. That's the smart move. I did the same thing about 8 years ago. Maybe purchase some stocks, ETFs, mutual funds, and learn another aspect of investing.
Rental Property Investor · NJ & NY · Member since 2019 · 31 posts · 6 votes
5y
Thanks, Jaron. What are your thoughts on moving the old 401k to my current 401k plan with my current employer to consolidate both plans? Or do you think moving the plan to a ROTH IRA is a better route?
Gonna push back on Jaron's sensible post for a bit. It is a different situation if you are investing the money, instead of consuming it to get by then its a math problem. 401Ks etc. gather tax free and thats a powerful factor, but real estate CAN outperform if well done. And current use can be more valuable than future use.And if you can legitimately use the cares act you don't have a penalty and have a 3 year window to mitigate the tax hit. You can really jumpstart stuff using funds like that.
Don't be too sure you can't get a loan from your old employers account, or move it to one where you can. I am still doing loans from a 401K from an employer I left 8 years ago--it depends on the plan. Roth's are great, you do have the tax hit on making the transfer but no penalty.
The loans are so powerful...they helped us by our starter home, and we were able to use one to buy our first investment property which doubled in value. It doesn't show up on your DTI and you pay back the money to yourself.
Rental Property Investor · NJ & NY · Member since 2019 · 31 posts · 6 votes
5y
@Jonathan R McLaughlin
Thank, Jonathan. That’s my plan, to leverage the funds in my old plan for a down payment on my second property.
But Vanguard (old employer 401k sponsor) won’t allow me to take out a loan since I no longer work with the firm. Thus, I’m not sure how to go about it; either roll over the funds to my current 401k plan and then take out a loan (I like that you pay the loan back to yourself with interest)
OR should I open a Roth IRA & transfer the funds from my old 401k. But I'm not sure how I can use the funds to purchase my second property once it's in a ROTH.
How did you get a loan from your old employers 401k plan?
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
5y
@Jonathan Cevallos Mine was with fidelity, and allowed loans after separation. I was with a large university so they may have negotiated their own deal but check them out. The advantage of the Roth is the tax free growth and the ability to withdraw without penalty. I misspoke earlier about tax free growth in the 401k. Its tax deferred. If you can switch 401K plans to one that loans thats probably the easiest route. Max is 5 years and I think 50K although Covid might have upped the IRS limits
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
5y
You can roll into your current employer. You can roll it to a private IRA or Roth IRA but you pay the tax on roth rollover. If your new employer has a loan program look at the rules to see how long you have to pay it back. The loan isn't a withdrawal for tax purposes. It becomes a withdrawal if you don't pay back in time.
Investor · Seattle, WA · Member since 2016 · 40 posts · 12 votes
5y
@Jonathan Cevallos You absolutely can and should invest at least part of your 401k into alternative assets such as real estate and other areas. Since you no longer work for you that employer, you are allowed to roll over your 401k into a self-directed IRA and you don't pay any taxes in the rollover. Once in a SD-IRA, you can invest in real estate in many ways including buy a rental property, but probably the best way is use of those funds as a private loan to other investors. You can safely and securely get 8-12% return on your money while also backing up your loan with a deed of trust on the property. Shoot me an PM and I can get you more info.
Rental Property Investor · MD · Member since 2017 · 102 posts · 21 votes
5y
@Jaron Walling Are you suggesting that the $20k that he pulled out would have grown to $200k?
My understanding is that @Jonathan Cevallos needs these funds to invest, not "keep food on the table". Jonathan, do your due diligence, take calculated risks, and if possible, use ALL available retirement funds to invest in RE. You won't regret 20 years from today.
Rental Property Investor · NJ & NY · Member since 2019 · 31 posts · 6 votes
5y
@jeremy anan that is correct, I want to use those funds as a down payment for my second multifamily property. Any thoughts on how I can best strategically use the funds in my old employers 401k without paying penalties/fees
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
5y
Rolled mine into an IRA and use it to passively invest in real estate. There are a lot of real estate vehicles that lend themselves to retirement account investing and make it easier to avoid things like accidentally self-dealing.
Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
5y
@Jonathan Cevallos
It may be a good idea to get on the phone with a rep from your current 401k provider and ask them about loan conditions and rolling funds in. I know I have taken a 401k loan and had a limit of 50% of the balance or 50k$. But if you are transferring in fresh funds make sure those would be available as a loan. Also make sure you have contingency. It sounds like you already have a MF property but if you separate from your employer the loan can become due. This happened to me when I unexpectedly left my employer. If you don’t pay it back it becomes a withdrawal and you pay penalty plus tax. Hope this helps.
Rental Property Investor · NJ & NY · Member since 2019 · 31 posts · 6 votes
5y
@Taylor L. What time of IRA did you roll your 401k into ? Can you elaborate more on the "different real estate vehicles that lend themselves to retirement accounts"?
@Taylor L. What time of IRA did you roll your 401k into ? Can you elaborate more on the "different real estate vehicles that lend themselves to retirement accounts"?
Sure - I used a Roth Self Directed IRA. In my opinion, syndications and lending are better options for self directed retirement accounts.
Syndications allow investors to be fully passive in the operation of their investment. That fact alone makes it less likely they'll accidentally break a self-dealing rule, such as if their IRA had actually bought a rental property, then the investor decided to try to self manage (that's a no-no). Syndications also allow the investor to leverage other people's credit, because the debt on syndications is nearly always guaranteed by the credit of the sponsors, and not that of the investors. It is important to know the rules behind UBIT in that case. My reasoning behind private lending is very similar, but my firsthand SDIRA experience is limited to syndications. I have friends and colleagues that use their SDIRA to do lending and it seems to work well. Naturally, both of these strategies (as with all investment strategies) carry risk.
Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
5y
@Jonathan Cevallos Going to have to disagree with the rollover to another employer 401k approach. I suggest two options of which I've done both.
1) Moving to a Self Directed IRA like many have said as you get to diversify and grow your real estate investment portfolio. If you already have another employer 401k, why would you put more money into bonds, etfs and stocks? Grow and diversify your investments. You can use this SDIRA to invest into syndications, other people's real estate projects, etc. Very nice option if you lack time and experience to jump into actively managing real estate property. I used my Roth IRA to invest in real estate and it's another option.
2) The other option involves a 401k withdrawal. I did this one as well. I pulled out 100% of my 401k with 0 penalty fee due to the Cares Act. I then invested into real estate that had the benefits of Income(cashflow), Depreciation(paper loss), Appreciation and Equity(loan paydown). I have the choice to pay the taxes on my withdrawn funds up to 3 years from now.
This applies to you as well. Three years is a long time. In three years, you could own a 3 sfh/duplexes for example. What could that mean to your finances and future? It could mean, you have the initial funds available to simply pay back your taxes AND keep 3 sfh/duplexes.
Let's just say though you have to sell one in 3 years to pay back your withdrawn funds to avoid taxes, well you still have 2 properties. 2 properties which you didn't have to start buying 3 years later because you finally saved up enough cash when your older for example.
This is possible from my personal experience. Just evaluate your goals and the return on your funds in either option. As someone said, best time to plant a tree, yesterday.
Hope that helps! Reach out if you have any questions.
Attorney · Austin, TX · Member since 2014 · 888 posts · 759 votes
5y
Like some said, roll over the 401(k) to a SDIRA. Rolling over is always going to be your 1st step.
There are lots of custodians that will let you lend out on private notes to flippers or buy and hold LL REI property. Sun Trust, Quest Trust, RocketDollar, etc., etc. But some won't, so ask in advance.
One thing you could do is use your retirement funds (in a SDIRA) to buy life insurance policy on you. You can then borrow against the value of the policy.
Another thing you could do is invest in stocks/bonds, then borrow against the value of the portfolio. I've heard products that will lend up to 40% of the stock value and 60% of the bond value.
Lots of ways to use the IRA money to invest in real estate. Just talk to a licensed professional in your jurisdiction who represents you...that's not me.
I have a 401k plan with an employer I no longer work for in 3 years. I want to use the funds for my second deal, but I don't want to pay the early withdraw fees, etc. What are my options?
I know I can't take a loan out since I no longer work there... Any recommendations on how to strategically use these funds? Transfer to a ROTH IRA, is an option I was looking into. I would appreciate any feedback and advise.
Jon, you can rollover old 401K into self-directed IRA and then invest in real estate. But keep in mind that it won't be "your" investment, but that of an IRA.
Leverage can be used but it must be non-recourse and will result in UBIT tax to an IRA. Self directed Solo 401k would be exempt from taxes in this case.
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
5y
Aside from an advisor on the financial side, look at the tax side as well. There are some Covid related breaks you can get on withdrawals but some will result in a near term tax hit if not handled correctly.
A good self directed IRA may in fact be better then your current employer plan, employer plans may have limited investment vehicles although some have very good loan provisions.
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
5y
@Jonathan Cevallos
Ignore all the noise and ask yourself if the numbers work. If you withdraw the money and use it for a down payment you will pay a penalty, but the investment will pay you back.
So factor the penalty into your assessment. Then the numbers either make sense or they don’t.
Jon, I would recommend to rollover the 401k funds into a Self-Directed Roth IRA account. This might not be the best way to fund your second property, as others have mentioned, you would be required to take out a non-recourse loan and be required to pay UBIT tax. It does allow you though for you to control how those 401k funds are used.
My wife and I were in a similar situation where we had left jobs and had old 401k accounts and did not know what to do with them. We ended rolling our accounts into SD Roth IRA accounts and even took it a step further and setup a "Checkbook" controlled IRA account where we setup an LLC and have our IRAs invested in the LLC. This allows us to be the managers of the LLC and in direct control of the IRA funds. Whenever we make a transaction we do not need to go through the IRA custodian and can act as managers of the LLC.
With this arrangement it's easy to invest in passive investments such as private lending and syndications. Really this opens up the possibility to many different investment opportunities. For the last three years we have been doing private lending and getting a consistent 10% return tax FREE! I know this might not solve your problem, but I think this is a good way to get your 401k funds working for you.