Cash out 401(k) for real estate investment?

5 Replies

Hello fellow BP members! I have a 401(k) that has been sitting for the last 3 years that I haven’t been able to contribute to because it is set up through a previous employer. I’m considering cashing it out in order to add to a down payment we’re saving for this year for our first real estate investment purchase next year. I have about $7,000 in my 401(k). Because I’m in my thirties, I know I’ll pay a 10% tax for early withdrawal, but I’m wondering if it’s worth it since I’m adding the money to the rest of our savings in a high-yield savings account. Open to suggestions and criticisms. Thank you, BP Family!

Hi @Abigail Gay and welcome to BiggerPockets!

Rather than cashing in the 401(k) and taking a huge hit (early withdrawal penalty plus income taxes), I would instead roll it into a self-directed IRA (SDIRA) and play the long game.

Used wisely, an SDIRA offers most folks the greatest shot at serious wealth creation -- even more than their active investment activities -- because it eliminates the friction of taxes.

You appear to be in Georgia. If so, there's some terrific SDIRA training coming to Atlanta at the end of March. I'll DM you the details.

For the record, this training is not mine and I earn ZERO fees by making the referral. I've just been before and found it outstanding!

@Abigail Gay , if you qualify for the IRS's guidelines as a first time homebuyer, the 10% penalty is waived for up to $10k.  Yes, you would still have to pay income tax on it, but you would likely have deductions from the home purchase to offset some or all of it.

Here's a link to the IRS's Exceptions to Early Distributions

Climbing atop my anti-traditional 401k soapbox: cash out and don't look back.  Only use retirement accounts where you have more control and can use it for direct real-estate ownership, such as SDIRA or Solo 401k.

@Brit F.   Unfortunately, this would not be our first home purchase so we won't be able to take advantage of the 10% penalty being waived.  I'm going to dig a bit deeper into SDIRAs to see what my options are if I transfer the funds out of my 401(k).  Thank you!

I ran into this situation. What I did was take out a loan on my 401K which is not penalized. I'll be paying 5.75% in interest which will be paid right into the 401k in the next 5 years. If you withdraw, you'll pay 10% penalties plus tax, etc.

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