Cashing out 401k to invest in RE

138 Replies

@Greg B. ,

I'm not going to argue that you did well. I am not arguing that moving the money is the wrong thing to do. I am just arguing that there are cheaper and better ways to do it.

Look at it this way:

If I have 100k in a 401k or Traditional IRA that I want to use for real estate investing. Depending upon my tax bracket I will roll over to a ROTH SDIRA 50% or however much keeps me low enough to avoid now to avoid moving any income into an even higher tax bracket. I will move the other 50% into a traditional SDIRA and convert the SDIRA to a ROTH on January 1st. I will invest the ROTH into real estate and in 5 years I will begin to withdraw the principal (does not have to be in the form of cash).

Once I hit the 5th year of Roth status for the conversion amount I can withdraw the principal as I please. Hopefully at the end of 5 years the owner of said account will be able to use the earnings in the ROTH SDIRA to continue building TAX FREE wealth.

This means I will have minimized my tax ramifications and been able to invest at the same time. I just feel giving your money away is irresponsible. Imagine you and your other half going on a few more trips per year because you took your time to move the money. Instead you gave away 40% or more. This means that at an annual rate of 20% it will take three years to recover what you gave away.

-Steven the Tax Guy

@Steven Hamilton II thank you for the advice and it may have been a way to go back then. We all make the best choices we could have made given the info we had on hand at the time.

On the other hand, certainly there are other creative methods a new real estate investor creating a new business can use to offset the cash out hit. Investing and business paper loses, start up costs, etc could be used to count against the income so that the tax rate would be lower and the 10% penalty would not be as painful.

Possibly more than one way to skin a cat?

I am fascinated by this discussion as I was also thinking about seeking advice in rolling over my 401k into a self directed IRA. Any recommended firms/people to use?

@Greg B. - I'm not saying that there's a one size fits all answer, and every situation is going to be unique. I wasn't saying that what you did was right or wrong for you in your situation...I was just trying to point out another thing that people should consider when trying to decide what to do in their situation.

I hope my post didn't come off as telling you I disagreed with your decision; that certainly wasn't my intent.

@Jscott, no problem. I do appreciate the various slants and points of view we have here. It is a testament to the amount of talent we have represented on this forum. Thanks for yours and everyone else's input.

Originally posted by Greg B.:

The fund manager that you pay for is not looking out for your interests. Your finances are not something you can give to someone else to trust to manage. That was a tough lesson for me.

I completely agree with everything you said.

Personally I won't go near a 401K or an IRA with a 10 foot pole. One reason is the fact that I don't trust my government. I wouldn't be surprised to see that when the sovereign debt crisis comes to these shores the government suddenly changes the rules and forces you to have at least 75% of your portfolio in government debt.

They will say it is the patriotic thing to do! Oh and if you don't like it - too bad. Because they will also prevent you from taking your money out of their system. Muhahahah!

My husband and I educate people in using their self directed IRA's and do use funds back by real estate. It is a great way to get a much higher and better return, working with investors who are savvy to utilizing these funds!

Here's a good company to consider to cash out your 401K into a self directed IRA/Roth.....then have investors help you grow it a lot quicker by investing passively in real estate.
Equity Trust Company... office: 888-382-4727
Good Luck
Once you do this, and you're interested in investing your funds, contact me for more information.

I was thinking of just paying the 10% penalty and tax, as I see stocks back at the same dangerous peaks hit in 2000 and 2008 (go to Yahoo and map the Dow going way back in time to now, and consider if we are in good or bad economic conditions). I then discovered SD IRAs and SD 401Ks, and this site. We were able to set-up SD 401Ks, and are now shopping for five more houses which fit our profile (built in the 2000s, very good schools, areas with good and diverse economic opportunities which should appreciate nicely, good rent vs price return, not California).

J Scott makes a great point about the compounding benefits of the tax-deferred account. However, it should be noted that you have greater investment flexibility with regular funds. It's very reasonable that you might earn 15% in a tax-deferred account making loans, but could earn 25% or more in a regular account. Assuming such a differential, the regular account blows away the tax-deferred account.

You can attain a greater return mainly because you can deploy leverage much more effectively (lenders don't like to lend to IRAs, and the IRS removes part of the tax benefit when you do so), which turbocharges your returns on buy & hold rentals. You can also engage in flipping activities, which could well attain annualized returns of 50% or greater. I know that use of leverage, and flipping, are higher risk activities and a risk-adjustment is warranted, but I think the point still stands.

Also, if you use prudent leverage (75% LTV), then you will control 4x as much property as you have capital. This will allow a great depreciation benefit in your regular account that acts as a tax deferral mechanism anyway.

I have thought of doing this as well. I have a 403B through work which I have continued to put money in because I get matching funds from work...but I haven't put money into my ROTH IRA for a while..I looked at the performance/rate of return over the last 5 years and it is pretty bad! Better than a CD I guess...but still!

My confidence in the market has changed a lot since 2008.

I have seen many people become rich investing in real estate..but how many people have you heard of that actually became rich investing in a retirement plan or the stock market?

Sure flipping property or renting it can be risky...but trying to flip a stock or hold it long term seems to be a lot riskier especially considering the mediocre returns.

Sure people bought property at the top of the market..but those people weren't even looking at cashflow.

The problem with the stock market is that even the experts can lose a lot of money. You don't find the experts in real estate losing money very often.

Joseph -

You're assuming that your Roth IRA can only be used to invest in stocks. Roll it into a self-directed IRA and use it to invest in real estate.

I can't speak for others, but I invest my retirement funds in real estate, and I'm expecting that my retirement balance will exceed my personal cash balance by the time I retire....

Jscott if you don't mind me asking, what company have you used to administer your self directed IRA. By the way, love reading your blog and posts. I have learned tons from you.

Originally posted by Daniel Thomas:
Jscott if you don't mind me asking, what company have you used to administer your self directed IRA. By the way, love reading your blog and posts. I have learned tons from you.

Thanks Daniel!

I use Equity Trust Company. If you search the forums, there's a relatively recent thread on SDIRA companies, and there are some good recommendations there. I like ETC, but I know others have companies they like even better.


Like J Scott said, do not limit yourself to only stocks and bonds within your SDIRA. If you feel that real estate would yield greater returns, fund your real estate investments through your self-directed IRA. In addition, since it is "self-directed" you can choose to invest in anything that you feel the most comfortable/well educated/etc. on. Just a few options you have to invest in are: residential and commercial real estate, undeveloped or raw land, real estate notes (mortgages and deeds of trusts), private limited partnerships (limited liability companies and C corporations), tax lien certificates, foreign currencies, and oil and gas investments to name a few. SDIRAs are an often misunderstood investment option and I hope I can add to these interesting discussions.




As others have stated, self-direct your IRA and your investment options open up. I personally try to place my best deals inside of my Roth IRA. I also try to max out my personal contribution of my Roth IRA as quickly as possible (every January) so that I can put that money to work - I spend the rest of year trying to figure out how to minimize my AGI so that my wife and I still qualify for the Roth IRA.

Thanks everyone, thanks for the recommendations on self directed IRAs I do know about them and I am going to start researching them more. It is reassuring that several of you are currently using them to invest in real estate. Can you use self directed IRA funds the same as cash? For example are you able to use the funds in your account as a downpayment..or does the entire purchase price have to be in your account. I.E buying a $100,000 property you need $100,000 in your self directed IRA account.

Are you able to combine money from the selfdirected IRA with cash in another account in order to purchase a property or does the entire purchase price have to be in the self directed account?

Does the cash flow that you get from rent checks have to go back into the account?

Can you use a selfdirected IRA to purchase a property that you intend to flip?

If your IRA makes the entire down payment, then your IRA has to take on the entire loan. The loan is typically a "non-recourse" loan and is only secured by the asset (i.e., no personal guarantee). Hence, the terms are a bit "harsher."

You can partner up with your IRA, and it's termed "undivided interest." Example: I buy a note with 50% IRA money and 50% cash, the buyers would be noted as "Loc R.'s IRA, 50% Undivided Interest" and "Loc R., 50% Undivided Interest."

As @Loc R. said, you may partner with your IRA; however, you CANNOT buy yourself out at any point from either end. If a repair is necessary then you will need to pay that with funds from each entity based upon the % of interest.

One way to make this a bit easier is to have yourself and your IRA partner in shares in a corporation or LLC. This will allow the LLC to operate, hold funds for future repairs and do relatively as it wishes. It can even choose to offer a dividend. This is one way in which if you and your IRA start a corporation at 20%(IRA) and 80%(you). The 20% may be used for a down payment and your contribution can be a loan guarantee(Do your research on this as the structure must be exact).

-Steven the Tax Guy


You are already receiving some well-informed responses on this topic so I hope I can add a little more clarity. You are able to use your SDIRA funds as a down payment. You do not need the entire purchase price, but are able to use a non recourse loan to make up the difference (see Loc and Steven). There are some intricacies that you need to be aware of so I would recommend talking to a full service, reputable, self-directed IRA custodian who can walk you through those things.

To answer your second question about combining money, we at Equity Trust Company refer to one option as the "private bank concept." The private bank concept is borrowing money from an individual's IRA for investments. For example, you can borrow money from someone elses IRA to complete an investment and pay the IRA back an amount of interest that is agreed upon in advance. Since IRAs are an exempt entity, interest earned on the money loaned is tax-free or tax-deferred depending on the type of IRA.

Regarding the cash flow you receive from rent checks, it does have to go back into the IRA as per IRS guidelines. Say your IRA purchases a property. Any expenses associated with the property (maintenance, improvements, property taxes, etc.) must come from the IRA. In addition, all profits must return to the IRA. That means all income (rent) and profits (once you sell it) are deposited back into your account tax-free.

And finally you asked if you can use your SDIRA to purchase a property you intend to flip. The answer is yes! Since it is “self-directed” you can choose to invest in whatever you see fit as long as it is not one of the IRS’s prohibited transactions.

I hope that answers your questions. If you need anything else clarified or would like additional information feel free to message me or contact me in some way.



A lack of transparency and a lack of immediate control of my money have always been my sticking points with 401k's. Apparently the disclosure laws are changing.