401k Question - To pull money out, or leave it

28 Replies

Hello everyone. I am new to investing and getting very close to finally getting my feet wet. Over the last couple of years my mindset has turned 180 degrees and I now look for investments rather than higher paying more work intensive jobs. So my current issue is.... Do I take the money out of my employer 401, or leave it? My goal would not to have to work for anyone ever again in the next 5-10 years, and live mainly off of my investments. I only have about $20,000 in there now, and assuming taxes and 10% penalty I'd probably come out with $12,000ish. This could give me a jump start on down payment for rental properties or rehab houses, etc.

What do you all think? I see no reason to further contribute to my 401k, as it's not a great investment in this day in age. And I think since I have such a little amount it in anyways, I don't see the point of rolling it over to a solo 401k or IRA and trying to invest with it. I feel like by just taking the penalty and pulling whatever is left out, I could get a quicker jump start on my investing. I am only 24 years old and eager to get started.

Please let me know your opinions and advice! Much appreciated!

@Mike Sheppard Pulling out of your 401K is not a bad idea and it is one I have been heavily researching. What is more important is what you plan to do with the money. Rather then cash out money right now maybe it is best to figure exactly what you want to cash it out for. Pick one, rental property or rehab project. I only say this because there is no sense to pull the money out for you to hold it in your bank account for the next few months or till whenever. Personally I think if you need the money and you have it in 401k/IRA use it wherever you will make the most money. With that being said, cash it out when the time is right.

@Mike Sheppard  

while you don't have a large amount in your 401k now, pulling the funds now and paying taxes and penalties would not be a wise move in my opinion. At your age you have quite a bit of time to grow your account into substantial amount if you do it right in a tax-deferred vehicle. You should do both, invest personally and take advantage of being able to shelter your gains in a retirement account.

And before you jump into being full time investor, be sure that you have another source of income, whether it is from investments or a business, that at least pays your basic living expenses.  

I'm considering same thing but I'm looking at doing the loan instead of taking it all out. I bet you could take the loan and get $10k (typically 50% of invested/vested amount).  You'd still have rest instead of losing it all.   I would love to hear other ideas. 

Hi Mike,

This is honestly not a very unique situation. I think that most investors or most employees looking to get a better return on their investments have asked this same question (myself included). Here is what I've done and I DO NOT SAY EVERYONE SHOULD DO THIS, but it does help me sleep at night for now.

I wanted my 401K to produce monthly income as well as be invested in real estate and increasing my ROI from 5% to something higher like 15-25%. What I have settled on was to invest my entire 401k into a single, extremely well researched REIT. I won't disclose the stock because I don't believe in giving stock tips so it is up to you do to the research. Discover what works best for your strategy and what your willing to learn about.

I'm not saying that I will leave my money in there for the long run, but I am happier knowing that it is making me $0.36 per share every quarter. I am keeping that money there until the right deal comes along. I keep it as a contingency fund. If the perfect storm comes around and I need the cash to fix repair a roof and put down a DP on the deal of a life time. You better believe I will withdraw this thing in full force to make more money and keep my business moving! 

Also I am a buy and hold guy, so I rely heavily on 0% interest credit cards for my renovations and repairs. If I can't pay for the repairs over the course of a year with the rents that are generated, then I probably need to downgrade the renovation I am planning on doing. This keeps more capital in the bank which is the KEY FACTOR to producing a solid DP for a loan every time!

@Rick Day  Nice point! I have a friend of mine that I used to work with. The company actually encourages taking out a no interest loan against your 401K in order to buy a house! Your money stays in your 401k building value and hopefully producing dividends, and at the same time you are leveraging it to purchase another investment. WIN/WIN. The best part is that your payment on the loan comes out of the payments that you are making to your 401K anyway!

Cheers!

I did it. Take a loan out though (not a withdrawal). Your goal should be to substantially beat the stock market. The best part is that it doesn't count toward debt. And you should be in a stable job so you can pay it back. If you leave the job before you pay it back, there may be consequences. Research and good luck!

@Mike Sheppard  - As others have mentioned, you'd be better off taking a loan than cashing out.

You should strongly consider any employer match in making a decision about contributions. If I had no employer match, I would not put a penny in my 401K. Luckily my employer matches 100% up to a 6% contribution, so I contribute 6%. The best part about this is that I'm getting a 100% return on my money immediately with some potential upside from the market as well. BUT the trick is that I can then take out a loan from the 401K, put my funds to work in REI while my employers match sits in the account and hopefully grows some.

More info about the matching program would be helpful in analyzing the situation.

Although employer matching is certainly "FREE MONEY" and should be utilized! It's not the only beneficial reason to contribute to a 401k. I regularly contributed 15% of my income even though my employer only matched 5% of it. My reason behind it was that I was able to lower myself into the lower tax bracket and was able to bring home just about the same amount of money as if I was putting in 5%! Basically not only did my employer contribute, but so did uncle sam!

I've been researching the same approach for some time (liquidating part of my 401k).  Something to keep in mind (which I believe you already know):  it's an expensive way to tap into money.  I will exhaust all other options before taking this approach. 

In addition to the 10% early withdrawal penalty, I've found that many employers will also hold another 10% for the taxes (federal only).  That's 20% off the top (loan shark rate!) and taxed on the entire amount.  You could get some of that additional 10% back (or pay more).  Of course, that all depends on where your effective tax rate falls after distribution.

I've read that you can avoid the second 10% tax withholding (from the employer) by transferring the 401k into a self-directed traditional IRA. The early withdrawal penalty is withheld under both scenarios - there's no way to avoid it - but there would be no employer to remove the second 10% tax, leaving you with more money in-hand. For full disclosure, I haven't done this myself. Although I am looking deeper. If there's a way to avoid an additional 10% tax (on top of the withdrawal penalty), it's fairly easy to make a transfer nowadays.

The tax man cometh under any scenario, but more upfront cash would be the most optimal approach.

My whole reasoning is, in several years I do not plan on working for this employer anymore - if I even have to work for anyone again. If I can get my real-estate business up and running in five years, I would rather focus on that. Obviously that takes time so I cannot quit now. But I don't have much money in there, a little less than $20,000. If I take a loan against it the most I could get would be a little under $10,000. That wouldn't get me far. I feel like pulling the money out, taking the "loss" which would have been money I never would have seen anyways, and using it to get a head start would be the better idea. I don't want to have my entire 401k loaned out and then want to quit my job.

Great responses above. I have a lot to think about.

This is really just a cimpative math equation

This is really just a comparative math equation.

Once you distribute the retirement funds, that's it, you have a taxable event. On the flip side, those funds can result in tax benefits via mortgage expenses, depreciation, etc. Calculate out this benefit over the life of the investment. You'll obviously have to take your personal taxes into account.

Now look at the option to simply purchase the same property with the tax advantages of an IRA or solo(k). You maintain the tax-deferred status and only pay taxes on the funds you withdraw.

If you take the time to do the math, you'll probably find that keeping the funds taxed deferred yields the most tax benefit.

I'll preface this by saying that I'm among the more conservative investors on BP.

I would recommend NOT taking money out as a withdrawal.  In fact, I think that taking a withdrawal or a loan may very well be a mistake; here are some reasons:

  • Diversification.
  • Penalties (10% fee is huge!)
  • I worry that you don't have a clear vision yet.  If you had a well-researched business plan and was 10K short, I'd remove this bullet.  But for now, it doesn't feel like you have a plan just yet.
  • Taxes.  That 18K will be taxed at your highest tax bracket.
  • Security.  Real Estate is risky, and most people on here have lost thousands in one sitting/lesson.  If you have a RE business and it flops, that 18K might be helpful to save you from losing your house, bankruptcy, etc.
  • Future loans.  Once you get 4 loans, the 5th will require you to have enough money to cover a lot of expenses.  You can consider your 401K as money in this calculation.  You can not consider cash-flow or equity in this calculation.
  • I believe stocks remain a good portion of a strong investment plan, and are indeed relevant today.

I also wouldn't consider a loan.  You will be double taxed on that money (once as income when you take it out, and then you pay it back with after-tax dollars) and will probably need to replay all of it immediate if you leave your job.

Everyone needs to take their own path, and I'll respect whatever decision you make.  But I would focus on learning and experience in real estate first.  Or, work in something that doesn't require large amounts of cash (e.g. wholesaling, bird-dogging, sub-2, intern for a flipper, etc.). 

Best of luck.

    You have some very good points. I've been reading and learning quite a while now. I'm pretty much to the point where it's time to take action. My plan is to get started. Either with rental properties south of me where it is more affordable, or buying a fixer upper house here in Northern VA, that I can live in while I'm renovating. Those are my two plans to get started. Both of which require money to get started. I also have some credit cards to pay off first to lower my DTI. If I had the capital to get started, and the DTI, I wouldn't even think of touching the 401k money.

    I can either leave it there, or take it out and get started sooner. I can't decide which would be the better investment. I am leaning towards taking it out and getting started within the next year. Or leave it and wait more years and be even more behind. I don't plan on working for this company in another five years. My job makes me a six figure income, but I can't stand it anymore. Taking out a loan would take money from me weekly that I could otherwise use elsewhere. I do know that the money payed back to a 401k goes to myself anyways, but it goes back into the 401k.

    What, specifically, would you do with the $12000 that you will get out of your 401K.  You say get started but what does that mean, specifically?  Would you use this money as the down payment on a rental?  Would you use it to pay off some of your debt?  

    If you had found an amazing deal in NC and you needed that money for the down payment, I could see that, but to me, there's no harm in leaving your 401K in place until you have a very specific use for it (like that great deal).  I would not take it out to pay debt.  That seems short-sighted.  And if you can get a loan for 1/2 and have that be 10K, yet you'd pull all of it out and only get 12K - it seems that the loan would be the much-preferred option (the loan is NOT considered income, as someone else said - here's a link that may help explain: http://moneyover55.about.com/od/preretirementplann...)

    Also, if you are making a six figure income, I would hope that you could save the same about (10-12) K in less than a year.

    Another point - even if you don't plan to retire from this place, you can roll your 401K over to a new job, or your own IRA once you quit. That money isn't lost to you by remaining in your 401K now.

    You have time to clarify your plan, analyze deals and find a great one, and then take action. 

    If I was a contractor I would look to start working for a rehabber. Let them know your long term goals and when it came time to take down your own property he might be willing to help you with the right connections, financing, etc. 

    If I had to start over I would find a job in and around the business.

    The 401K loan is a good product if your provider offers it.  I've used it several times to buy properties.  The loan process through the provider is quick, got the check in 7 days.  The interest rate you pay (pay yourself) is cheap.  I highly recommend it.  My mental justification is your buying assets with your assets...

    I love the money in my 401K because it grows tax free. I maximize the funds in my 401K.  If you are making a six figure income and you only have 20K in the 401K, you are not putting away enough, IMO.  You should be putting a lot MORE in there if you are planning to be self-employed in 5 years.  When you leave the employer you can move those funds to a solo 401K at that time and invest it in your real estate activity.

    Thinking in terms of a 5 year plan is really smart. Think ahead about what a well stocked 401K can do for you in 5 years.  In the meantime, as @Russell Ponce  suggests, what will be most valuable to you in 5 years is experience.  Hook up with people that do this.  There are some very low capital ways to get into real estate that will allow you to learn. 

    I am just finished my first year seriously investing. With the help of strong relationships with people who know what they are doing and some luck, I made some money, I know a lot more than when I started and I see a path to a decent return from this activity.  There is a lot of learning before you really make any money to understand what type of activity suits your risk tolerance and skills. 

    No offense, but $20k or $12k may be enough to get you started, but is highly unlikely to allow you to become financially independent in 5 years.

    Without knowing more about your personal situation (other than what I skimmed through from your posts here), I would say NOT to take money from the 401(k) - not as a loan, nor a withdrawal.

    I would contribute up to the point of your employer's match, if applicable, and begin to save money in a non-retirement/after-tax account. Chances are, you can accumulate that $12,000 from scratch without sabotaging your retirement account. Worst case scenario, as some have already mentioned, you have the 401(k) money there at your disposal when the right opportunity presents itself. I would not have the, "cash it out and get it over with" attitude.

    Just my two cents. Best of luck with whatever you decide.

    To expand on my previous post, I came across some information which showed that less than 16% of employers will allow an "in-service" rollover.  So the rollover to avoid additional employer tax withholding is an unlikely scenario.

    if the amount you can get doesn't acquire you property or finish a rehab to flip or rent leave it alone. It shouldn't be a stepping stone to need more money. Bite the bullet and do more jobs and save more to the point you can pull down that money and get something purchased or completed with it.

    You make 6 figure income, have debt and only $20K in your 401K? You aren't ready to take the next step. You aren't disciplined enough to pull this off. With that income, you should have no credit card debt and much more in your retirement.

    @Brian Mathews I have had a 401k for four years. I am 24 years old now. Four years ago, I was making $30,000 including overtime trying to survive in Fairfax, VA where the median income is just over $100,000 a year. A cheap, small, run down house costs $2,500 to rent. A one bed one bath apartment an hour and a half away from work (DC) that requires you to sit in the USAs #1 worst traffic, costs $1,500 easy. In four years I have worked my way up to about median income; just over $100,000 - keep in mind I work closer to 80 hours a week than 40 most of the time. You can bet I was not contributing hardly anything to my 401k for the first couple years, I was trying to survive with multiple roommates in places I did not like at all. I am finally at the point where I can rent a house, and I am. The best deal I could find in the area I want, was $2,300 a month. A 3 bedroom, 1.5 bath house. And I got a deal because the house is owned by a co-worker, I'm paying less than what he could be getting for it. Do I need the house? No. That is why I am giving it up. I will go back to an apartment. I will sell my cars, and anything else I don't need. Do I have credit card debt? Yeah, that I can now finally begin to pay off, because I no longer need them to buy groceries. I'm not married, I don't have roommates or anyone to split rent with, or utilities etc. I don't have much left at the end of each month to save. And what I do have goes straight to credit card payments and utilities. There is a little left to save, but not much. So I'm giving all that up, going back to smaller living places, and saving more money. Finally getting my head above the water and I want to use that money to make more money.

    Taking that money out of the 401k would certainly help me. It would nearly pay off my entire credit card debt - or - it would be almost an entire down payment on a rental property in Raleigh, NC, which I visit frequently for family. This isn't something I would do right away. Maybe a year from now, after I've gotten more money together for a larger down payment, repair costs etc etc. It would help me jump start whatever I decide to do pretty well. And the way I see it, there are better things I could invest money in than a 401k. For example, currency trading. I don't have any large capital, but I can consistently produce a 3-4% per MONTH ROI, with ease. The problem there is, you need a lot of money to make money. That easily beats a 401k. And that is just one example. Being 24, who knows if that 401k will still be there in 40 something years when I can finally take it out.

    All in all, it's not a big deal either way. It's a small amount of money that wont make a big difference in the long run as far as getting started in REI is involved. You all have great points and thank you all for the advice. I will likely just leave it unless, as suggested, a great opportunity comes and it would help.

    @Mike Sheppard

    You are talking about a 401k as if it is a TYPE of an investment, which suggests you don't have a great understanding of it. It is an employer sponsored retirement plan, which should provide you with a wide variety of investment options. Do you know what your 401k money is invested in?

    You stated "I feel like pulling the money out, taking the "loss" which would have been money I never would have seen anyways." What exactly does that mean?

    My suggestion would be to select an index fund, if available in your plan, that mirrors the S&P 500. There are much better ways to launch your REI career than to take money from that account.

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