Analysis on SD IRA vs 401k Withdrawal

[Mark Turner]

Has anyone done a long term analysis on moving 401k funds over to a self directed IRA vs taking the early withdrawal penalties, tax implications, etc of just liquidating the 401k fund?

My experience with a SD IRA ...is it becomes evident everyday how limiting it is....While it's a great way to acquire real estate, there are a significant amounts of rules and limitations on its proper use. In addition, later decisions on selling or keeping assets once you become 59 1/2 have to play into the process.

While I love 401ks, one has to consider opportunity costs and existing debt service...etc.

I'd be curious to hear if there is an analysis out there by anyone.

[Brian Eastman]

@Mark Turner

Any such analysis would need to be very much personalized to be meaningful.  There are a whole lot of factors such as age, tax bracket now and in retirement, account value, investment goals, expected return....

A point I frequently make to help folks clarify their understanding is that investing in real estate with qualified funds such as an IRA or 401k is entirely different from investing in real estate with after tax funds, and comparing the two is comparing apples and oranges as a result.

The better comparison is how an IRA invested in real estate compares to an IRA invested in traditional assets such as stocks. If you can produce better results through investments in property or private lending, then you can grow a nice big pile of retirement savings in a tax-deferred environment. The fact that a retirement plan will be tax-deferred means you can grow the account to a larger value than if you were paying taxes along the way with each investment.

A simple analysis you could do would start with the following premise:

If you have, say, $100,000 in a retirement plan, in order to take it out you would give up a 10% penalty for early distribution (if you are under age 59 1/2) as well as whatever your tax bracket will be if you add $100,000 to your adjusted gross income.  That will likely turn the $100,000 into more like $55-60K.  If you then compare investing that $55-60K amount over x years in real estate and paying taxes on the income, vs investing $100K in a tax-deferred account earning the same return, you should come out ahead on the retirement plan side due to the larger amount of starting capital and the elimination of taxes along the way.

Yes, there are rules with a self directed IRA that come with the tax-sheltered benefits, but you can easily operate within those rules to put the IRA capital to good use in real estate or related assets. You just need to keep the right perspective, which is different than investing with your own funds.