Should I take out 401k to use in real estate?
Rental Property Investor · Plymouth MA · Member since 2019 · 41 posts · 12 votes
With now being able to take out money penalty free from a 401k and where the market is currently, would taking the money out now and saving it for investing in real estate be a smarter move long term? Especially with the real estate market potentially correcting in the next 6-12 months my gut tells me this may be a good idea.
With now being able to take out money penalty free from a 401k and where the market is currently, would taking the money out now and saving it for investing in real estate be a smarter move long term? Especially with the real estate market potentially correcting in the next 6-12 months my gut tells me this may be a good idea.
Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution or loan. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.
Distributions:
If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").
Loans:
Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.
Here are the details regarding the loans:
NEW LOANS:
The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.
Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:
EXISTING LOANS:
The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.
Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
If you meet the above conditions:
@Joe M.
Why do you say bad idea?
@Adam Aschoff Yes. The key is to choose a good partner or investment group to work with; investing in real estate is far more challenging than it is made out to be - you need systems for (1) marketing to sellers, (2) analyzing opportunities, (3) interacting with Brokers, (4) outlining projects, (5) re selling the property and (6) record keeping to learn from your experiences. Do you have a plan that addresses these things?
With now being able to take out money penalty free from a 401k and where the market is currently, would taking the money out now and saving it for investing in real estate be a smarter move long term? Especially with the real estate market potentially correcting in the next 6-12 months my gut tells me this may be a good idea.
Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution or loan. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.
Distributions:
If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").
Loans:
Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.
Here are the details regarding the loans:
NEW LOANS:
The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.
Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:
EXISTING LOANS:
The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.
Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
If you meet the above conditions:
@Moises R Cosme
I do see your point though I still think the points you outlined come with experience. As many people I listen to I or watch say the first step is the hardest part. In being someone looking to take the first step these items I think will more so come with learning the ropes. Thank you for your insight.
“Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated way“
@George Blower some of the enumerated ways listed on the IRS websites seem to be quite vague. Eg: being affected by being quarantined at home which much of the US has. Since nearly everyone has been impacted in some in the US, wouldn’t most folks qualify?
I agree that it is vague. @KC ReaneyPer IRS Notice 2020-50, the IRS issued additional guidance regarding how one might qualify which might be helpful:
I think it depends. Obviously if you don't qualify to take a distribution penalty free, I think its a bad idea to cough up 10% of you money. If you can access it without penalty and you needed it for an emergency or have a lock on huge returns with an investment you can't access via your plan, I think it's a great idea.
However, diversification is critical to overall investment success. Not enough real estate investors are savvy in the stock market, or have pre-conceived negative opinions about investing in it. The same goes vice versa.
Both asset classes have their advantages. Many times, when one does well, the other doesn't and vice versa, so you've got some balance being invested in both. 401Ks are a fantastic way to build wealth because it automates your savings before you even get the money and it's tax-free on the front end. If you have an employer match, even better.
I'd personally max the 401K out to the limit and save after tax money for RE. If that's not possible, at least contribute up to the employer match. Let it grow until retirement.