401(k) Withdrawal for Real Estate Investing

[Gabriel Starr]

We've all seen the models and read the thousands of articles that say not to touch your 401(k) until you need to in retirement. However, we also don't have a lot of control of how that money is invested and the accounts gets hit with management fees each quarter regardless of how it performs.

I am considering cashing out my 401(k) most of which is a ROTH 401(k) to purchase more real estate. I own a duplex (live in one side and rent the other) and I almost live rent free. I've seen much more advantages and bigger returns from my small down payment on my duplex than I ever have in my 401(k). Between cash flow and tax advantages, I am seriously considering getting more aggressive with real estate.

Cashing out my 401(k) is something I would've never considered, even a year ago. But looking at projections of what my balance will be in 30 years versus cash flow and equity of real estate 30 years from now and I'll say I'm starting to believe that all the hype of the 401(k) is just so the financial institutions can hold on to your cash and leverage it instead of you doing it for yourself.

It is so ingrained in us to not touch our 401(k)s that I get sick when I think of it, until I look at what that money could do in real estate. Even with taking the 10% fee and paying taxes.

So, has anyone here done this?!

[Joe Homs]

@Gabriel Starr you need a self-directed 401K so that you can start investing in Real Estate.  Reach out to @Dmitriy Fomichenko who can set you up right away.  There are great YouTube videos out there to invest using your 401K funds.  Build up your 401K with real estate tax differed, or in your cash tax free in the Roth.

Good Investing...

[Daniel Murphy]

@Gabriel Starr, I wouldn't say that 401k's are bad.  They're a good investment for the masses.  As a RE investor, you have to realize that we're a group that is comfortable thinking outside of the box & taking on more work & risk.  Yes, I believe that long-term RE investments will outperform. But it also comes with a cost of extra work & complexity.  

You mention that the 401k & investment have fees, so does RE.  Property taxes, insurance, repairs, software etc.  We just tend to mentally think of this stuff in a different way as they are not labeled "fees".  As humans, we're taught that "fees" are bad so our brain tends to process anything with the word "fees" differently than we would process "property tax".  

All that being said, if your 401k is mostly in Roth assets, your "cost" to withdraw it may be pretty minimal. You can withdraw your contributions out of a Roth IRA anytime tax free as a return of your basis. The gains are subject to a 10% IRS penalty & taxation. However, if you're talking about a Roth 401k (vs. a Roth IRA), you may not be able to withdraw the full amount of the assets. In a 401k, your technical term is called a "participant". IE, you're just participating in the plan that your employer setup. You only have a certain amount of control & options. Think of, you're riding a bus. You're a passenger. You can't do whatever you want, you have to do what the bus driver says & go where the bus driver drives.

Email your HR department & ask for your "summary plan description".  They are required by law to give this to you annually & it spells out all of the boring details about your plan. This is where it will tell you details about withdrawals, loans etc.  

[Bryan Martin]

Quote from @Gabriel Starr:

We've all seen the models and read the thousands of articles that say not to touch your 401(k) until you need to in retirement. However, we also don't have a lot of control of how that money is invested and the accounts gets hit with management fees each quarter regardless of how it performs.

I am considering cashing out my 401(k) most of which is a ROTH 401(k) to purchase more real estate. I own a duplex (live in one side and rent the other) and I almost live rent free. I've seen much more advantages and bigger returns from my small down payment on my duplex than I ever have in my 401(k). Between cash flow and tax advantages, I am seriously considering getting more aggressive with real estate.

Cashing out my 401(k) is something I would've never considered, even a year ago. But looking at projections of what my balance will be in 30 years versus cash flow and equity of real estate 30 years from now and I'll say I'm starting to believe that all the hype of the 401(k) is just so the financial institutions can hold on to your cash and leverage it instead of you doing it for yourself.

It is so ingrained in us to not touch our 401(k)s that I get sick when I think of it, until I look at what that money could do in real estate. Even with taking the 10% fee and paying taxes.

So, has anyone here done this?!

Not sure on the dollar amounts involved in your personal situation, but have you considered a loan from your 401k?  Once you take the money out, you don't get that chance again to have those contributions grow tax free in that Roth account whereas if you take the loan, you can pay it back and get those contributions back in your 401k.

[Chris Seveney]

@Gabriel Starr

Historical returns on market and real estate are almost identical. Paying a penalty and taxes on that income vs growing it tax free is a huge uphill battle

It’s like racing to try and gain 5 minutes of time when Waze says you will be there are 2:05 pm and it’s 1:50 and your trying to get there by 2.

You may think it will be better but chances are it’s not. How did your 401k do the last 4 years btw.? People get so negative when it goes down but last several years were great.

[Troy P.]

Like mentioned previously, the returns will be almost identical.  Where RE really shines is in the tax benefits.  I suggest reading Tom Wheelwright's Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes.

There are a lot of variables here.. how long have you been contributing, what is your employer match, what are your investment options, etc.  I personally contribute enough to get the max employer match and not a penny more, and choose market performing funds with very low ERs (expense ratios).  In the book mentioned above, Tom explains how government sponsored retirement funds are not the best place to grow your money tax-free, but he doesn't mention all of the "free" money given by most employers.  Chances are, you will get a 50-100% return just for participating, and that to me is a no-brainer.

A better option, like mentioned above, is a self-directed Roth IRA.  The goal is to retire richer than you are now, right?  This is Tom's reasoning for tax-deferred plans not having your best interest in mind.  Why defer taxes for when you will be making MORE and in a higher bracket??  If you meet the requirements, a self-directed Roth IRA is a great option for "staying in the game".  

[John Morgan]

@Gabriel Starr

It sounds like you know what you’re doing in RE and will make much more $ over time with RE vs your Roth 401k. I would say go for it and eat the 10% penalty. I assume you aren’t able to do a 50k 401k loan? I’ve done a few of those to buy or rehab RE. I’ve taken out 92k from our Roth IRAs (tax free) to buy houses. I tell people to put the absolute minimum into their 401ks to match whatever their company is giving them for free. Then put everything else in their Roth IRAs so they can pull it out later for any reason tax free. Just the amount they’ve put in over the years, not the earnings.

Here's an example of a property I paid cash for with $ from my Roth IRA 7 years ago. Paid 56k for it with that cash. Was only making $300/month off it. Sold it and did a 1031 exchange to buy a bigger SFR. Did a cash out refi on it a few years later to use the cash to buy 3 more rentals. Total net cash flow after all my expenses on these 4 houses is $3200/month now. And it all started with me tapping my retirement funds to use the power of leverage with RE. And my tenants are paying these mortgages off and I've got 350k in equity with them now. And these 4 houses should appreciate well over time with market rent going up to produce more and more passive income. So yes, I'm a fan of tapping into your retirement to scale up and let RE make you wealthy over time. Especially if you have a little experience with RE and sort of know what you're doing. Good luck!

[Jordan Holt]

very inciteful information from everyone. I have also been thinking of doing this. Last years "returns" on my 401K was 1%. When things were booming I was only at 18% return. IMO I can make more than that when leveraged for property. 

[Dave Skow]

@Gabriel Starr-  consult with a CPA / accountnt  about the tax ramifications and details of liquidating your retirement account  ....this might change your thinking  ....also - you might get  an outline  of  what you want your next purchase to be   and then  get  pre approved for this  scenario  so that you  have  your financing  in place and  know approx  the amount you will  need to  come in with  for this transaction  ...doing this will  insure you can  get a loan plus give you soem guidance on the amount you will need  ......also keep in mind that  lenders   like to  have  6-12 of payment  reserves  for every property owned  and often  retirement account is used to meet the  reserve  requirements  for amny loans 

[Linda Weygant]

If you qualify, you could roll over your 401k to a self directed IRA and invest in real estate WITHIN your retirement plan rather than raiding it.

It's the best of both worlds.