Cashing out 401k to invest in RE

137 Replies

@Steven Hamilton II @Greg B. @Mark H. @J Scott @Jeff S. This is exactly the discussion I was looking for. I'm trying to make the decision what to do to make my first investment. Here's the options: I can refinance a second property that I own for about $19,000. I don't like paying closing cost again but is it more profitable in the end? I have a 415 retirement plan with $27,000 that I could withdraw or move into a SDIRA. There is no 10% penalty on that. I have a 401K with $18,500. I'm assuming the way to go there is to move that into a SDIRA? Some additional info: I have a separate State retirement plan. I'm no longer employed to the entity that provided these deferred comp accounts therefore cannot take a loan on them. I no longer contribute to these accounts. Right now my wife and I qualify for the 15% tax bracket. Even with the SDIRA transactions I might be able to stay in that range. But even if we don't is it profitable given the data provided?: I'm only getting 9.7% on returns. The retirement forecast states I'd have $110,000 ($440 a month) at age 65. I feel like I would do much better with real estate starting now! But I would appreciate advice on the most effective utilization of these funds from financial planners/accountants/investors that have far more knowledgeable. Also I'm seeing some mentions of self-directed 401K's. What's the advantages/disadvantages of each? Sorry for asking for the repeat of the subject but I need the Financing 101 Breakdown for Dummies version. Thanks for all your participation in BP.

@Dustin Dummer There are many knowledgeable contributors to this thread and it's definitely worthwhile to get everyone's perspective. In addition to the technical analysis, such as the breakdown of the potential current tax hit, a large part of the decision is based on personal circumstances and expectations for RE investments.

Regarding the self-directed retirement plan uses of those funds, there are two ways to approach this: 1) self-directed IRA and 2) self-directed 401k. Each one has it's strong points. Broadly speaking, the 401k route offers far better features, but the qualification requirements are more stringent.

The self-directed 401k Plan that your hearing about are plans that are crafted for those that have self-employment income and no full time employees - a.k.a Solo 401k Plans. Self-employment income is a requirement because 401k plans must be "sponsored" by a business. While all 401k Plans can be crafted with all the flexibility and features that you may want, when there are full time employees that eligible to participate it tends to be difficult to implement in a cost-effective manner. Hence, the requirement that there be no full time employees. Partners and spouses are OK.

Among the benefits of the 401k are no UDFI on leveraged RE investments, contribution limits for both deductible, nondeductible, and Roth that are far higher than for IRAs, and loan feature.

Funds from other retirement accounts can be rolled over to either IRAs and 401ks tax and penalty free. Roth IRAs should not be rolled over to 401k plans.

There's lots more to say....but this post has gotten long enough. Let's hear what others have got to say.

@Bernard Reisz Thanks for the reply. I was trying to figure out if SD401K and Solo IRA were the same thing, I think you're saying they are??? Now the qualifications are still confusing. Currently I am a W-2 earner. But if you do a rollover into one of these SD401K's then from what I'm understanding is many people form an LLC to be able to control how the money is distributed. Does this then qualify as self-employment? If not then the SDIRA would have to be the way to go, right?

@Dustin Dummer There's some industry jargon that could use some clarification: "self-directed," "checkbook control," "IRA," and "401k."

"Self-directed" retirement accounts, refer to accounts that give you the freedom to invest in a broad array of assets permitted by the tax code; in contrast to standard accounts that only allow investment in stocks, bonds, and mutual funds. With "self-direction," there may still be a custodian that controls the funds and processes each transaction.

"Checkbook Control" goes beyond "self-direction" by giving you direct control over retirement funds. With "checkbook control" there's no custodian that handles transactions for you; you have an account from which checks/wires can be written to invest.

"401ks" and "IRAs" are defined in the tax code and are distinct types of retirement accounts; they're not industry jargon. Both IRAs and 401ks can have "self-direction" or "checkbook control."

Being that IRAs require a qualified custodian, those wanting "checkbook control" do so with the use of an LLC. "Checkbook control" of a 401k can be achieved without an LLC, as they don't require a qualified custodian.

If you have W-2 income only, SDIRA is the way to go. If you have self-employment income in addition to W-2, you can have a Solo 401k.

@Dustin Dummer ,

There is no such term as "Solo IRA". IRA by definition is Individual Retirement Accounts, anyone can have one. 401Ks are on the other hand are employer sponsored plan (not individual). Solo 401k is a "simplified" plan designed for those businesses who don't have any other employees besides business owner and his/her spouse. 

@Bernard Reisz I think maybe I was confusing something, so let me make sure I understand. I was trying to determine if I could transfer my 401K money into a SD401K plan AND THEN designate that money as a self-employed LLC to invest in properties. But I think what you're saying is that it is where the money comes from that determines whether you can qualify for the SD401K in the first place? In my case all of the monies came from W-2 therefore what you're saying is it would only qualify to be used in a SDIRA, correct? But with the use of an LLC I can still control how the money is applied. I just have to work with a SDIRA party to manage it all. Do I understand this correctly? Thanks so much for your input.

@Dustin Dummer , you can't have self-employment activity inside of your retirement account. In order to establish self-directed Solo 401k plan you must own a business w/o full time employees or be self-employed. If your only source of income is W2 - you are not eligible for a Solo 401k plan. However you can have SD IRA since anyone an have one and you don't need to qualify for it. And if you wish to have a checkbook control that truly self-directed Solo 401k offers you can add an LLC component to the IRA to gain checkbook control

@Bernard Reisz The intent is that I may need mixed funds in order come up with enough to invest. I may refinance a loan for part of the down payment. I may use additional money from the SDIRA conversion. My initial understanding is that once a SDIRA is used all funds must come from that account for that investment. And in order to use money from any other source I thought that you had to then use the checkbook control utilizing the LLC? Can this be simplified to not need the checkbook control if I just apply the cash from the refinance directly to the down payment then set up the rest through the SDIRA. Again great that these options are available but very confusing.

@Dustin Dummer Mixing SDIRA funds and personal funds is doable, but adds complexity. There cannot be any transfer of assets between yourself and the SDIRA. Therefore, if the property is initially purchased by the SDIRA or with personal funds (one or the other), subsequent investment would have to be from the original investor. If the initial investment is made by both the SDIRA and yourself, all subsequent investment would have to be pro rata.

Using leverage within an IRA requires awareness of some additional issues such as (a) UDFI and (b)that any loan taken by SDIRA to finance deals cannot be personally guaranteed by you.

Originally posted by @Steven Hamilton II :

I strongly suggest in most cases the loan from the 401k. As you can deduct the interest you are paying yourself.

Steven - I did not know one could take deductions on interest paid back on 401K loans. Does the 401K administrator provide this information in year-end 1098?

Thanks,
Gautam

Originally posted by @Mark H. :

Much like the poster above, my wife and I cashed in old 401k's. During the stock-market crash, I transferred our old 401s into self-directed iras, when things calmed down last year, we paid the penalties & dumped the cash into down payments for two rentals. It wasn't our entire nest-egg, but the deal worked for us.

What's the actual return on your 401k in a "safe" investment? In our case, we were getting a few hundred a year on $60k in a money market account. Now we're netting that every month, and call it skill or luck, the properties have increased in value significantly.

The tax arguement doesn't wash with me, I'm 100% certain my tax rate will never go down, better to pay it now & invest in something useful that I can control.

I wouldnt call a money market an investment and compare it to the returns of an actual investment like real estate. Its more of a checking account at a financial/brokerage institution.

Also, I'd be interested to hear how you can you be certain your tax rate will never go down when it's not entirely in your control. Tax rates can and do go up or down drastically based on legislation, which is a reflection of economic/budget trends, the president, needs of government, etc. This also assumes you are never out of a job/business which ignores the fact that sickness, injury,  or life circumstance happen. 

Originally posted by @Dustin Dummer :

@Bernard Reisz The intent is that I may need mixed funds in order come up with enough to invest. I may refinance a loan for part of the down payment. I may use additional money from the SDIRA conversion. My initial understanding is that once a SDIRA is used all funds must come from that account for that investment. And in order to use money from any other source I thought that you had to then use the checkbook control utilizing the LLC? Can this be simplified to not need the checkbook control if I just apply the cash from the refinance directly to the down payment then set up the rest through the SDIRA. Again great that these options are available but very confusing.

Dustin, all transactions involving your IRA must be "arms length". If you buy the property in an IRA the funds for the down-payment must come from the IRA, you can not use personal funds for a down-payment on a property you are buying in your IRA, that would be considered a "Prohibited Transaction". 

@Ann Bellamy I'm curious to know the specific name pf your SDIRA. I'm interested in doing the same, but Fidelity (my 401k provider) is telling me that their iras can only be withdrawn from once per year with only a 60 day loan period. 

Originally posted by @Jon Bachman :

@Ann Bellamy I'm curious to know the specific name pf your SDIRA. I'm interested in doing the same, but Fidelity (my 401k provider) is telling me that their iras can only be withdrawn from once per year with only a 60 day loan period. 

Jon, what you are referring to is called "60 days rollover". That is when you take personal distribution and deposited those funds into qualified retirement account within 60 days - this will not be taxable event. You can do this once a year.

However, you don't want to do that! What you should do is "direct rollover". Do not take personal distribution, move funds directly from your current custodian to the new custodian. You personally don't touch the funds and there is no limit how many direct rollovers you can do.

@Jon Bachman , it took me a while to find my comment in this very old thread.  And since I didn't reread the entire 5 pages, I hope you are asking:  "How do I lend out of my 401k without withdrawing the funds, and going over the 60 days?"

You need a Self-directed IRA, not a Fidelity IRA. Fidelity doesn't provide the service of self direction. If you ask them if they do, they will say yes, you can choose what you want to invest in, but that means only that you can invest in any of their offerings. In order to lend out of your IRA, you must put it with a true self-directed custodian.

I personally use UDirect, and am very happy with them, but you should understand that I have a "checkbook IRA". (google this, and search in BP) My accountant is no longer recommending that strategy, and he says the IRS is taking a much closer look at the "Checkbook IRA" and will probably eventually invalidate that model as compliant with the code. The only reason I continue to use it is that I lend out of it, and am not hands-on they way I am in real estate.

@Marcin Nurek ,

the reason you don't want to take a distribution from your retirement account is because that would be taxable event (unless you deposit the funds into another qualified plan within 60 days). Instead you want to do a "direct rollover" - from one retirement account directly into another retirement account, you personally don't touch the funds. There are no tax-consequences for this and you can do it as many time as you wish, whereas 60-day rollover is only allowed once per year. 

@Jon Bachman

The once per 12 month rollover rule only applies to IRAs not 401k plans. However, you would not want to do a 60 day rollover from a 401k as 20% has to be withheld from the distribution so you will only receive 80% of the funds. Therefore, the better option is to process a direct-rollover from the 401k to an IRA so that you can transfer all of the funds.

Ok so, it's official! Per Drs. orders; after not working; due to an 'On-The-Job' injury and collecting Workers Comp for almost 3 yr I may need/be medically forced from trucking.

My question is: although I only have 118k in my 401K, what are the best programs out there to & for moving my money over and/or withdrawing it completely(Don't care about the fees & penalties, as REI is a better investment) without having a custodian(expense)? Don't want to be charged to use MY money!!!!

Looking to start new LLC and start & fund my new business account w/Navy FCU on January 1, 2018 to give myself a WHOLE year to get up and running before seeing/paying Uncle Sam!

Basically been retired for 2 1/2 years now...... OPINIONS NEEDED as to WHICH direction is BEST!

@Camellia B.

you don't need to take distribution from your retirement account in order to invest in real estate. You can do so by using self-directed IRA (or Checkbook IRA if you wish to bypass the custodian and avoid transaction fees associated with one).

If you have any self-employment activity then a better option might be truly self-directed Solo 401k plan, with it you can completely eliminate the custodian, gain better protection from creditors, access your retirement funds tax-free via participant loan feature and more.

Income from any investments you make with your retirement account must be going back into the IRA or 401k, you personally can not use it.

@Dmitriy Fomichenko what would happen if you used self directed IRA funds to purchase a property, then you wanted to take control of that property outside of the IRA (before 59.5). I presume you'd be taxed and penalized but what would they base it on? The value of the house?

@Brian Rosenthal ,

what you are referring to called "in-kind distribution". That is when you distribute the property itself (not the cash) out from an IRA. Distribution is a taxable even so you would have to establish the value of the property by doing a formal appraisal on it at the time of distribution. The taxes (and penalties) would be based on that amount.

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