How to use money from my 401K to fund my first purchase?

12 Replies

Hello,

I have 260K in my current employer's 401K and I want to start investing in multifamily buildings for passive cash flow. My goal is to replace my W2 income (5K) with passive cash flow from real state investments as quickly as possible. I would like to purchase a multi family turn key property in the Memphis, TN area.

Any Ideas on where I can start?


Please advise.

Thank you,

Faustino R.

Funds borrowed from your own 401k can be used for down payment. Give your 401k folks a call, ask them about it.

I have been thinking of doing the same thing, but please consider a few things I found out.

If you have been funding your 401k with pre-tax money, you will have to pay higher taxes when you take a lump sum instead of a monthly payout.

If you are under the retirement age, you will be charged an early withdrawal penalty (mine is 10%).

There are some exceptions to the early withdrawal, such as if you are purchasing a primary residence with the funds. 

You can also borrow against your 401k, which might give you another funding option if you can't get funding the other usual ways.

Determine if, after these taxes and fees, you have enough to invest in your property to make more of a return on investment than your 401k is making. 

You won’t be able to transfer the existing plan if you are still working for that employer unless you have reached age 59 1/2.

Look into Self directed IRA or Solo 401K. I recommend talking to a tax consultant before you make any decisions. If you make the wrong move, the tax implications could be very substantial.

Use Quest, or Equity Trust Company. Very reasonable. Then do diligence on a syndicator for a larger MF deal, or invest according to whatever strategy you're involved with. Very easily done. I think the IRA needs to be "untethered" from an employer.

@Faustino Ramirez you can turn it into a solo401k if you have left the employer that sponsored it.

@Faustino Ramirez

reach out to to the administrator of the 401K plan at work and see if they allow you to take loans against it.

Some 401K loans allow employees to take out the lessor of 50% or $50,000 from their 401K($50,000 in your case).

@Faustino Ramirez

I am going to go against the grain here and just give my two cents.  If you are just starting out in real estate I would NOT use your 401k as a form of leverage.  Reason being you are still brand new (I'm assuming based on your writing "start investing") and mistakes will be made.  Instead here is what I would say:

In today's markets there are various ways to leverage.  I believe the fact that you are entertaining this form of leverage means you have a basic idea that there are other ways to raise capital.  I would implore you to find another way first.  Once you have several real estate deals in your pocket, then go leveraging that 401k.  At least at that point you will have experience and you will be BETTER equipped.

If you are no longer with the company you could probably put it into a self directed ira with no or minimal penalties, and use the money. Listen to a very recent podcast called six figure house flipping with Gabe Desilva from December 21, 2017.

Explains how he did that to start his very successful business and growing fast in just 3 years.

If you want to avoid taking such a big hit on withdrawing $ from your IRA, there are plenty of equity investors out there who will step in as a partner with non-recourse funding. That's not cheap either, but it will keep your IRA intact if the deal falls apart after you take ownership. I'll send you a connection request if you want more info...

Faustino, welcome to BiggerPockets and congratulations on your first post on the forum!

You will not be able to use your 401k to replace your current income. While it might be possible to rollover your 401k funds into self-directed IRA and then invest in multi-family real estate - you will not be able to use the income from that investment. That income must be going back to the IRA.

Retirement accounts are designed for your future benefits, at retirement. IRS rules prohibit you from receiving any personal benefits from your IRA now, before retirement.

The fact that your 401k is with your current employer means that you will not be able to rollover those funds into another retirement account until you leave that employer. 

You could take early distribution but you will be hit with taxes and penalties. The entire amount will be considered taxable income in the year you pull it out and will push you in a higher tax bracket and as a result you will end up paying as much as half of that amount to 'uncle Sam'. Not a wise move. 

If you looking to creating some income from real estate investments now - you need to look at other options. 

My suggestion: Do not take money out of your 401k to find real estate financing

Reasons

1) It will be a giant hit to your 401k value when you reach retirement age. Not only the money you are taking out right now, but also lost appreciation that withdrawn money would have given you. And the taxes you have to pay reduces the effectiveness of your withdrawals.

2) You will be putting all your eggs in one basket, it will leave you vulnerable if something goes bad with your real estate investment.

3) Based on your current income of 5K per month, I assume that if you live frugally for couple of years then you can save 40K or so. And that would be 25% downpayment to a property in mid-west. And that would get you started.

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