Cashing out a Roth 401k
Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votesI have been told all my life in saving into my 401k that you need to save the maximum that you can. So for many, many years I have been saving the absolute maximum allowed by the government every year into the company sponsored Roth 401k with the employer matches.
All that money just sitting there; I feel as though I could do a lot more with it in real estate. Especially when I see myself losing $15k in one year. But taking any out, that would be going against everything I've been preached to over many years, so that's why I hesitate.
Anyone else feel that way? It's like after the zombie apocalypse, feeling bad for taking stuff from a grocery store without paying for it.
If you've been in that situation, what have you done?
As a Chartered Retirement Planning Counselor, I have to caution against taking the money out early. Even with a Roth 401k, there are some penalties for early distributions. On top of that, if you are still an active employee with the company that offers the 401k, you may not even be able to withdraw the money and have to rely on just taking a loan from it.
That being said, I always tell people it's all about diversification. A 401k, Roth 401k, or IRAs, are just one aspect wealth building. You never want to put all of your eggs in one basket, but if you are investing in real estate as well as tucking money away in a tax-advantaged retirement account, you're simply diversifying, not only in the investments, but with the tax strategy as well. We have no idea what the future holds, so having money invested in various ways will allow you to structure your withdrawals later in life to make the most of it.
If you are unhappy with your Roth 401k performance, change it. It's been the best bull market in decades in recent years, so if you lost money recently, you may need to adjust your holdings. You have a decent amount of control and can park the money in steady income-producing investments, the stock market, or any combination that your plan allows. So I'd look at how your 401k can compliment your total investment portfolio, including real estate, and structure your investments so that it makes sense for your end game scenario. It shouldn't just be seen as a single account/investment and then ditch it without first examining how it plays into your total financial picture. Maybe the answer is to reduce how much you put into the 401k and direct more of it toward real estate, but until you sit down and look at the numbers you'll never know.
As a Chartered Retirement Planning Counselor, I have to caution against taking the money out early. Even with a Roth 401k, there are some penalties for early distributions. On top of that, if you are still an active employee with the company that offers the 401k, you may not even be able to withdraw the money and have to rely on just taking a loan from it.
That being said, I always tell people it's all about diversification. A 401k, Roth 401k, or IRAs, are just one aspect wealth building. You never want to put all of your eggs in one basket, but if you are investing in real estate as well as tucking money away in a tax-advantaged retirement account, you're simply diversifying, not only in the investments, but with the tax strategy as well. We have no idea what the future holds, so having money invested in various ways will allow you to structure your withdrawals later in life to make the most of it.
If you are unhappy with your Roth 401k performance, change it. It's been the best bull market in decades in recent years, so if you lost money recently, you may need to adjust your holdings. You have a decent amount of control and can park the money in steady income-producing investments, the stock market, or any combination that your plan allows. So I'd look at how your 401k can compliment your total investment portfolio, including real estate, and structure your investments so that it makes sense for your end game scenario. It shouldn't just be seen as a single account/investment and then ditch it without first examining how it plays into your total financial picture. Maybe the answer is to reduce how much you put into the 401k and direct more of it toward real estate, but until you sit down and look at the numbers you'll never know.
Well I have the 401k, plus a separate IRA (that has its own limits for annual deposits and income) as well as a few checking/savings accounts as backup/immediate funds.
I guess I'm just someone who sees how much there is to know out there, and I want to know it all. I want to know everything there is to know about how best to manage my 401k but it seems a little daunting to me. I don't want to make mistakes. So I picked the "retirement" fund and basically let someone else manage it.
I want to know everything there is to know about subject to, land contracts, land trusts, etc. I found the BP forum and have been digesting everything I absolutely can. I wanted to know more about what Section 8 was and how it worked so I bought books and read everything I can online.
It can be overwhelming to want to know everything and not have the time to learn it all. (Or learn it as fast as I want to learn it.)
I have heard about being able to take out a loan on a 401k but wasn't sure if that was available with a Roth 401k or just a traditional 401k. Since the Roth is after-tax contributions, does that mean that if I take a loan out, I won't be taxed again?
I thought that financial advisers were supposed to be able to help me with these things. I met with one years ago. He asked me what my monthly expenses were. I gave him a number. He didn't believe me and had me list out everything line by line on a 'worksheet'. It added up to the number I originally told him. Then he tried to sell me insurance.
I met with another financial adviser about a year ago. (Him and his supervisor.) They said I was doing everything "right" (other than I didn't have a will) and then tried to sell me insurance.
I don't think I'm getting the right advise for what I want to do but I'm not sure who to contact or what I should research to learn more. I'm willing to put in the time but feel as though I don't know which way to turn.
Dawn A.,
What are your goals financially? Truthfully, you might want to consider what investment types your company allows. Sounds like you have two 401ks there, One traditional to which they contributed the match. And one the Roth which you contributed to.
There is nothing wrong with keeping the funds in those accounts as long as you are investing them appropriately. I know RE makes the biggest gains current; however, it might be worth keeping some funds safer. It depends upon your goals.
-Steven
OK, I will lend my .02 (at 6% LOL): Steve is the tax guy and he knows the regs. I know just enough to know that I DONT want to be in the tax field. I would check with someone that can guide you and see if a self directed plan would be allowed. I had a company SIMPLE plan as well as another IRA. I rolled both into a self directed 401K. In your situation, you probably cannot do that, but you might be able to convert one of your plans to self directed. Self directed offers a lot of advantages including the possibility of buying real estate, doing mortgages, buying gold or silver, as well as the traditional stocks and bonds. I got out of stocks and bonds in early 2012 and am glad I did. Find (if you don't already have one) a good tax man that has knowledge of self directed plans and see what your options are. Best of luck!
John Thedford
Naples, FL
Using 401k money helped me get part of the down pmt money for the apt building that allowed me to leave my job for ever:) To me money locked up in a 401k might at well be money in a hole in the back yard.
Besides the stock market has grown so fast the last few years how much longer can this thing go before it pops. One thing is for sure the bond market will implode soon! Right now being on the side lines in cash flowing real estate gold or silver will be a powerful place to be in the next several years until these global governments and banks quit printing money and engaging in currency wars.
I agree with William Bannister. I've been in your shoes and decided to liquidate my roth ira's (was even able take a loss on them) to buy more sfr rentals. Have never regretted the decision. Particularly, if your time horizon is pretty far out, the only question should be, where can you get the best return for your risk tolerance? If you are even halfway decent at real estate, you should be able to crush the returns the stock market can deliver with lower risk. Mindlessly plowing money into the stock market just doesn't make much sense to me anymore. I've run the numbers for myself and if you're contributing up to the match, taking the penalty (and paying taxes if it's a traditional 401k) has always made the most sense.
This is all good advice. I do need to find a good financial planner who can sit down with me and go over everything I have going on and truly answer all my questions. I know posting on a forum is good to get general ideas, but no one can truly know how to answer specific questions based on one person's scenario without having all the information. I need to find someone who doesn't want to just try to sell me stuff.
Dawn A. I am a retired financial planner and have also sold insurance . you will find that the vast majority of "financial Planners" make their living selling investments and insurance and relatively few do fee based planning for a living. Most of your needs from what I can tell have to do with technical answers regarding the tax status and flexibility of your current qualified (tax favored) retirement plans. If you are still actively at work with the company who has your 401k you are not able to roll it over to a self directed plan and I would be limited to the investments made available by the administrator. I have many friends and acquaintances who are fee based planners and frankly even those professionals have a vested interest in selling product. You need to be able to understand how each investment fits into your personal financial goals and you will find that very few planners are well versed in real estate as investments and will most likely steer you away from real estate into more traditional products. Good luck with your goals , it sounds like you have made an excellent start with your current real estate activity.
I am sure that one in a very similar situation could have found some other creative means to obtain the apartment building, still keep the 401k and have best of both worlds.
Roth or traditional, a 401k or IRA is Not money in a hole in the backyard, it is a great tool that can be used to grow it using RE as the vehicle.
A 401k account has its ups and downs. Although its more memorable to remember the "downs" because losing $15K is one year is something to remember, far more than the ~13% return in 2012.
If most of what I want to know, I can learn from researching on my own, I'm willing to do that, but I'm also willing to pay for expert advice. I can't be an expert in everything at once (although I want to!)
My ultimate goals:
- To have enough money for retirement to live a comfortable but not extravagant life (new car every 10 years, modest house of about 1000 sq ft, small vacation every year, maybe a slightly larger one every 5-10 years)
- To use rental properties as a means for recurring revenue which I will manage myself until I get older at which point I would like to go with a good PM company
- To be adequately protected insurance wise
- To ensure that my money is working FOR me and I'm not working FOR it
- And ultimately to leave the world a little better place
Are there any good certified financial planners in the Milwaukee area that anyone would recommend?
Hey Dawn, for what it's worth, I have always borrowed against my 401K (or whatever account) so I avoid early withdrawal penalties. The best is if you have a self-directed that you can use to invest in real estate, but if you don't, like I didn't initially, you can take a loan against it. The nice thing is all the interest you pay, you pay directly back to your own account. So like if you bought a rental property with the money, the interest would cut into the amount you pocket each month in cash flow, but that money is just being paid back into your retirement account, so you actually aren't losing any money.
I just watched a webinar about a Nicaraguan development I work with where they had a segment with an IRA/401K expert on it talking about the options for investing with those funds. If you are interested in checking that out, let me know.
Ali
Right now If I had cash I would in addition to buying real estate I would drop money into silver bullion. I am buying 300 a month and have been since 1999. My purchased used to be 50/50 split between gold and silver but lately its 100% silver because the technicals show it to be much better then gold moving forward. I always take physical delivery no etf's or contrasts. Too much manipulation of the markets to play with etf mining stocks or contracts. Just give me 1 ounce gold coins or 10 ounce and 100 ounce bars of silver.
Its also a good place to build up cash when you saving to buy real estate. It seems as though these bars are bullet proof to inflation.
Rather than start another new thread, I thought I'd hijack this one. @William Bannister do you still feel the same way? I'm only a couple years out of college, so I've got less than 10k in my Roth IRA and a mentor suggested I close out my Roth IRA and use the cash towards a down payment. With the way the market is looking, it make sense to get out now, hold the cash in silver or gold for 4-6 months and then buy when the market dips. From all the news I'm reading it looks like we're going to take a step back this year as far as the economy goes, is that what everyone else is seeing?
@Thomas Dowell You should explore other options before you distribute the money and get hit with the penalty. You could transfer the money to a self-directed custodian and look into deeds of trust, tax liens, etc. Call some custodians and get some information. You could still park it in precious metal investments with the IRA until you decide what you can do with it.
@Dawn Anastasi Wanted to follow up - what did you decide?
My @ isn't working, so maybe I can get Dawn's attention with keyword Milwaukee WI
@Dawn Anastasi have you got any responses?
First - are you 100% certain it is a Roth and not traditional? Roth contributions have already been taxed, and my understanding is that the Roth contributions can be removed without tax consequences when done properly. Roth gains are another matter.
I pose that question because company plans are often the traditional variety, where pre-tax dollars fund the 401K investments.
sorry for the delay in responding. ??i have not found a financial planner. and i did not cash outmyretirement acct. the loan is good enogh for my purposes.
@Dawn Anastasi You've probably read a few threads on cashing out IRAs or 401ks to invest in RE. I've noticed that people on BP tend to favor this approach, but on many other forums people would never cash out for a number of reasons. To each his own.
One of the benefits of IRAs and 401k plans that I haven't seen mentioned is that both plans are basically untouchable in the event of bankruptcy, lawsuits, etc. So your investment properties may be at risk if you are sued (insert LLC and umbrella insurance debate here) or or for some reason you need to declare bankruptcy, but IRAs and 401k plans are protect - but these laws vary by state.
Hi Dawn,
People are saying many things that are technically true, but no one is really answering you question completely. I will attempt to begin to answer you question, but will probably take more than one post.
First, you have been doing what most Americans do, which is what all Financial advisers, recommend that people should do. That is save as much as you can starting as early as you can and invest it in the "only place they can legally" recommend. That is SEC approved products listed on Wall Street.
You are correct in that your retirement money could do a lot better if invested PROPERLY in real estate! However, please know that no financial adviser is going to help you to invest in real estate, except for REITs, which is no better that stocks. They are not allowed too...
What a few people hinted at, but did not explain completely is that you can invest your 401k, IRA and Roth 401k funds into real estate without cashing out your retirement accounts and paying tax penalties. You can use these funds to invest in real estate and keep the real estate assets in your retirement accounts. In other words you can have the best of both, it just has to be done properly. Here is the catch, there are many reputable firms that can guide you with regard to rolling over your retirement accounts to true self-directed custodians that will allow you to invest in Real Estate. The problem is that these same reputable firms cannot legally recommend what you should invest in... It does require that you take control, do you homework and make your own investment decisions. No small task!!
A few more clarifications: For your current employer 401k account, while you can roll over the entire account and still enjoy employer contributions; you can roll over any portions/amounts of the account that is fully vested. Leaving the account still open and continuing to make new contributions.
Also when acquiring real estate with "qualified funds" (your retirement accounts) and utilizing Acquisition Debt (a mortgage) there is some tax to be paid on the income, even in a Roth account. It is called UBTI (Unrelated business taxable income) and that is taxed at "Trust Rates" not the same thing as normal income tax rates.
Finally it is rarely advisable to borrow against your retirement funds, unless it is a personal or family emergency. The funds have to be paid back within certain time limits, otherwise you may have to pay the same penalties as if you withdrew the funds. Much better to invest the funds while keeping them inside the retirment accounts.
So with good information, you can accomplish what your instincts are telling you you should be able to do, in order help secure a better retirement for yourself.
Happy to help,
Alan
Correcting a typo:
A few more clarifications: For your current employer 401k account, while you CANNOT roll over the entire account and still enjoy employer contributions; you can roll over any portions/amounts of the account that is fully vested. Leaving the account still open and continuing to make new contributions.
Also when acquiring real estate with "qualified funds" (your retirement accounts) and utilizing Acquisition Debt (a mortgage) there is some tax to be paid on the income, even in a Roth account. It is called UBTI (Unrelated business taxable income) and that is taxed at "Trust Rates" not the same thing as normal income tax rates...
Alan made several good points. I would like to add regarding UBTI on leveraged real estate - if Solo 401k is used to purchase investment real estate this tax does not apply as opposed with self directed IRA. Solo 401k is exempt from this rule.