401K roll over to payoff investment property

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401K roll over to payoff investment property

Dominik Makaneole
Investor · Kauai, HI · Member since 2017 · 65 posts · 43 votes

Aloha All, Looking for Tax specialist or investors who have experience with rolling over a 401K into investment properties.

My situation: 1) I have a military retirement so I'll always have something to eat and medical insurance.  2)  My wife and I have 8 rental units which all cashflow in the Hawaii market which sees higher rents and equity every year.  We are not at what the IRS considers retirement age.  We both are planning on changing jobs soon and our 401K's could pay off 4 rental units.  Our 401K's produce 10% a year.  Rents in Hawaii have climbed 22%-29%+ in 5 years. Average sale prices up 45% from last year.  

My wife and I have been land rich cash poor for many years because of our strategy to acquire property in an area with a high barrier of entry.  We are looking to minimize the risk of hurricanes, etc. by getting these mortgages paid off ASAP.  Our 401K should jump start the snow ball affect in paying off these loans.  Also, we want to enjoy life more now that we have young grandchildren.

Thank you for any advice you all can offer,  

Dominik Makaneole

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Joshua ThompsonBusiness Member
Accountant · Melissa, TX (Remote) · Member since 2017 · 210 posts · 135 votes
2y

Aloha Dominik! I was stationed out on Oahu a while back, good times and good people!

This, in my opinion, is more of a financial question rather a tax question.

I'm a big fan of diversification but a few things didn't make sense here. Why pay off 4 rental, that usually has increasing expenses and average 6% rent increase yr/yr (it's been a extremely high rent increase the past 6 years) by cashing out a 401k that averages 10% per year? Don't get me wrong I know the benefits of paying off a mortgage early but now you're putting more eggs in the HI basket considering you're nervous about hurricane exposure. I much rather see you adjust your insurance to match current market rates, let the tenants continue paying off your mortgage, and continue to invest in your 401k.

If you take funds from your 401k to do this you might get hit with the 10% early withdrawal penalty + the income tax if it's not a Roth account, and that is only at the federal level.

If cash is what you desire to pay off a few of the rentals, have you considered selling one of the rentals, pay off as many mortgages as you can with it, and save a few thousand to buy a different property somewhere safer from hurricanes? Yes, this will result in a tax hit but at least your 401k can continue making you 10% per year, you diversify more, and cash flow will increase from those properties.

The big thing comes down to your goals, what you want to accomplish and your full financial picture.

Good luck!

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y

    @Dominik Makaneole

    You cannot use your 401k money to pay off mortgages on properties you already own personally, and you cannot move these properties into your retirement accounts.

    Your only option in implementing your pay-down plan is to withdraw money from your 401k and then use it for payoff. The withdrawn money will be taxable and will possibly incur a 10% penalty on top of it. 

    Whether or not it makes sense to pursue is very much case-by-case. Find yourself one of us tax advisors and analyze your situation.

    1Reply
  • Joshua ThompsonBusiness Member
    Accountant · Melissa, TX (Remote) · Member since 2017 · 210 posts · 135 votes
    2y

    Aloha Dominik! I was stationed out on Oahu a while back, good times and good people!

    This, in my opinion, is more of a financial question rather a tax question.

    I'm a big fan of diversification but a few things didn't make sense here. Why pay off 4 rental, that usually has increasing expenses and average 6% rent increase yr/yr (it's been a extremely high rent increase the past 6 years) by cashing out a 401k that averages 10% per year? Don't get me wrong I know the benefits of paying off a mortgage early but now you're putting more eggs in the HI basket considering you're nervous about hurricane exposure. I much rather see you adjust your insurance to match current market rates, let the tenants continue paying off your mortgage, and continue to invest in your 401k.

    If you take funds from your 401k to do this you might get hit with the 10% early withdrawal penalty + the income tax if it's not a Roth account, and that is only at the federal level.

    If cash is what you desire to pay off a few of the rentals, have you considered selling one of the rentals, pay off as many mortgages as you can with it, and save a few thousand to buy a different property somewhere safer from hurricanes? Yes, this will result in a tax hit but at least your 401k can continue making you 10% per year, you diversify more, and cash flow will increase from those properties.

    The big thing comes down to your goals, what you want to accomplish and your full financial picture.

    Good luck!

    Thompson Tax Group LLC551 Reviews
    WebsiteView Page
    3Reply
  • Austin Cheatham
    Accountant · Louisville, KY · Member since 2020 · 75 posts · 55 votes
    2y

    I would advise against using the 401k to pay off your loans. Typically the 401k withdrawal for this would incur a 10% penalty on top of normal income tax. With it sounding like a substantial amount, you could be looking at paying 45% in taxes on that money (10% + 37% tax bracket). Nearly half of your money eaten into by tax. 

    If you are dead set on this, I would recommend pulling the money out in phases. Possibly year over year to help lower than tax burden but you will still likely incur that 10% penalty. Feel free to reach out if you'd like to discuss or run some numbers on the situation. Always happy to help!

    1Reply
  • Dominik Makaneole
    OP
    Investor · Kauai, HI · Member since 2017 · 65 posts · 43 votes
    2y

    Thank you for you responses, I would only consider this option if there was a way to avoid a tax penalty.  I only posed the question because I've recently watched a video where a couple rolled their 401K over to purchase a RV park.  

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Dominik Makaneole:

    Thank you for you responses, I would only consider this option if their was a way to avoid a tax penalty.  I only posed the question because I've recently watched a video where a couple rolled their 401K over to purchase a RV park.  

    The key is: NEW purchase. Yes, you can roll your 401k into a self-directed 401k and buy properties. But you cannot use the money for properties you already own, other than by withdrawing money.

    Even if you avoid the 10% penalty, you do not avoid the tax.
    0Reply
  • Dominik Makaneole
    OP
    Investor · Kauai, HI · Member since 2017 · 65 posts · 43 votes
    2y

    @Joshua Thompson You make valid financial planning points.  I would only consider the 401K option if there were 0 fees associated with it.  Looks like its not.  I consider these rentals my retirement plan and will hold them as long as possible to maximize the value at a later date.  I will be selling some of my portfolio to pay off all mortgages when I'm ready to retire.  I realize I will be losing tax benefits in doing so, however at some point in the near future I would like to simplify my workload in tax preparation and managing many different mortgages every month.  I prefer the simpler financial situation.  I'm not clear on the best route to minimize my risk exposure to hurricanes but I do see the value in diversifying assets.  Thank you again. 

    0Reply
  • John BowensBusiness Member
    Investor · Member since 2024 · 44 posts · 36 votes
    2y
    Quote from @Dominik Makaneole:

    Aloha All, Looking for Tax specialist or investors who have experience with rolling over a 401K into investment properties.

    My situation: 1) I have a military retirement so I'll always have something to eat and medical insurance.  2)  My wife and I have 8 rental units which all cashflow in the Hawaii market which sees higher rents and equity every year.  We are not at what the IRS considers retirement age.  We both are planning on changing jobs soon and our 401K's could pay off 4 rental units.  Our 401K's produce 10% a year.  Rents in Hawaii have climbed 22%-29%+ in 5 years. Average sale prices up 45% from last year.  

    My wife and I have been land rich cash poor for many years because of our strategy to acquire property in an area with a high barrier of entry.  We are looking to minimize the risk of hurricanes, etc. by getting these mortgages paid off ASAP.  Our 401K should jump start the snow ball affect in paying off these loans.  Also, we want to enjoy life more now that we have young grandchildren.

    Thank you for any advice you all can offer,  

    Dominik Makaneole


     Dominik, this is a common analysis individuals will go through as they develop their rental property portfolios. A few things to consider as you conduct this analysis. I can't say whether you should, or shouldn't, but hopefully the following will help provide some direction: 
    1) You are likely already aware, if you distribute funds from your 401(k), early (prior to 59.5 years of age), you will incur a 10% penalty and ordinary income taxes on the amount distributed. The amount you distribute is added to your overall ordinary income, so you need to analyze how that holistically effects your tax situation. 

    2) 401k/TSP funds often carry additional outside creditor protection, meaning if you had a judgement against you, an ERISA governed 401k can carry additional protections from creditors being able to get access.

    3) Your 401k, whether pre-tax (tax-deferred) or even better (Roth after-tax) has strong tax-advantages. Think compounding interest in the absence of taxation. 

    4) At some point you can look at self-directing those funds into real estate and other assets, that could potentially generate a better return then when you stated you are making. Ultimately, putting you in more control. 

    All said, makes sense to analyze from from a cost/benefit analysis perspective to make the best decision. As someone that is passionate about retirement savings account, I always lean to not distributing funds from retirement plans.

    0Reply
  • Joshua ThompsonBusiness Member
    Accountant · Melissa, TX (Remote) · Member since 2017 · 210 posts · 135 votes
    2y
    Quote from @Dominik Makaneole:

    @Joshua Thompson You make valid financial planning points.  I would only consider the 401K option if there were 0 fees associated with it.  Looks like its not.  I consider these rentals my retirement plan and will hold them as long as possible to maximize the value at a later date.  I will be selling some of my portfolio to pay off all mortgages when I'm ready to retire.  I realize I will be losing tax benefits in doing so, however at some point in the near future I would like to simplify my workload in tax preparation and managing many different mortgages every month.  I prefer the simpler financial situation.  I'm not clear on the best route to minimize my risk exposure to hurricanes but I do see the value in diversifying assets.  Thank you again. 


     Of course! This is a great situation to have a sit down with your tax professional and financial advisor to discuss the best course of action to accomplish your goals and to learn about any tax/financial landmines while making these decisions. I know it may cost a few hundred dollars to do so but these decisions will make a large impact on your tax or financial picture.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    I think you can make the argument to take out a 401K and pay income tax + penalty if you have a high interest rate credit card.
    However, I wouldn't take out the distribution to pay a mortgage.

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