Should I cash-out 401(K) or let it grow?

4 Replies

Hi, I have a 401(K) savings plan with a previous employer valued at under $50,000. I'm wondering if I should withdraw and hold the money in my brand new real estate investment bank account or if I should continue to let it grow until I need it for a downpayment on my next property? There are plenty of penalties if/when I withdraw it. I'm unclear at what point is it worth paying the taxes on the capital gains if I'm not immediately using it.

Word-on-the-street is having money in my bank account looks good to banks when I'm looking for a loan. Does it matter that the money is just sitting there or do they want to see some activity with that account? Thanks for any advice.

Don't rob Peter to pay Paul. Find a better way to fund real estate investments. 

Peter = 401(k)

Paul = banks, lenders, Uncle Sam

Hi @Marc Ferguson ,

This can be a simple math problem that you might be able to solve using excel or some other calculator. Simply find the FV of the account today without withdrawal, and do the same with withdrawal based on the intended investment. However, I wouldn't recommend simply pulling the funds out so that you can have liquid cash in you savings account. There are many lenders out there, and you should be able to find one that is willing to work with you.

Also, consider a self-directed IRA. There are investment requirements that you should speak to someone who is way more qualified than me about. You could put this money in one of these accounts and possibly use it to work for you without taking that penalty and tax hit.

@Marc Ferguson

I previously took out a 401(k) Loan and then ultimately took a 401K distribution to get started in real estate investing.

Some cons of taking out a 401K loan are that it gets added to your taxable income and taxed at your marginal tax rate.
There is a 10% penalty if you take a distribution.

Why I think taking a 401K distribution is not as bad as people make it seem to be.
Once the money is yours, you are not tied to the strings of a 401K - You can do whatever you want with the money and don't need to wait FOREVER until you are 59.5 years of age.
You are transferring it from one retirement account to 'another retirement account'. I consider real estate investing a sort of retirement account, hopefully after 15 / 30 years of investing you have a paid off investment that is also providing cash flow.

Taking a 401k distribution can accelerate the time it takes to get into real estate investing - It is not about timing the market but time in the market.

Also, if you can get a real estate property for under market(say you brought a $100,000 property for $90,000), you already made up for the penalty that you had to pay for the IRS.

Thanks fellas. I appreciate your candid feedback. @Joshua B Pruitt I think I will put a bit more effort into running the numbers on this. @Basit Siddiqi it was a mindset shift, but I recently considered real estate investing a retirement plan. Prior to being exposed to this I would have NEVER considered touching my 401(K). Now I can be persuaded.