Redirecting funds away from 401k into RE investments

5 Replies

In the pursuit of financial freedom, I am considering redirecting my funds from my 401k into another vehicle that's liquid. This will give us immediate access to the money for purchasing/rehabbing properties. I'm not planning to touch what's already in my 401k, simply redirecting the funds that are going there from my pay. I'm curious if others have done this and what others' thoughts are on this technique. I know most people will say "that's a terrible idea, you're taking away from your retirement" and my wife has even had similar concerns. I've explained to her that 401k values are not guaranteed and we're still setting aside the money for investments, just more near term vs long term. I believe building out real estate portfolio will prove more valuable to us in the long term than a 401k will.

Hello Wayne,

If your work offers a 401k match, that is the minimum you should do - that is essentially free money.  If your work offers a Roth 401k, you can pay taxes now vs later if you believe your tax bracket will be higher in the future.  With the remaining money, you can start to build a 6-12 month reserve for emergencies.  If you have a family, I'd lean closer to 12 months reserve.  After that, any excess money can go into real estate/index funds/ indexed universal life insurance.  You can house hack with ~10% down every year and in 10 years will own 10 properties.  The downside of real estate is lack of liquidity, but if you have a large cash reserve, it shouldn't be an issue.  Index funds provide a safe 8% return over the long term.  Indexed universal life insurance provide safety for disability/death in case life happens, but also has cash value which is invested in index funds as well.  Any growth in the cash value bucket is tax free if you take a "loan" against your cash value.

For me personally, I try to be as liquid as possible and try to maximally leverage real estate. I have a problem putting all my eggs in 1 basket so I personally invest in almost all vehicles (401k/IRA/Index Funds/ Indexed universal life / RE).

I hope this provides value.

@Wayne Bolen I recommend what you are suggesting to my clients interested in investing in real estate. I recommend that they continue to invest into their 401k up to the company match and, if their 401k plan allows, to invest their contributions into the Roth option. Then, any excess funds they were investing in their 401k can be deposited into a real estate investment fund (a money market fund at their bank). When you've accumulated enough funds for a down payment for a rental, then purchase one. And, then repeat the process. If you can save up enough funds to use the BRRRR strategy, then go for that to build a porfolio faster.

If you leave your employer, then you can roll your 401k out to a self-directed IRA and begin using those funds for real estate investing activities. My favorite strategy is to lend to other investors using the BRRRR strategy or flipping houses.

Hope this helps.

@Wayne Bolen Hi Wayne, i did this when i first started real estate investing and needed to build my working capital and it helped. Real estate can provide much better returns than your 401k if done well and many corporate 401ks are laden with poor fund choices and expense ratios. Once your real estate is cash flowing well you set up various retirement vehicles to catch up retirement savings if needed.