401k Plan - Smartest Way to Use It

New to Real Estate · Member since 2023 · 9 posts · 9 votes

Hello,

I wanted to know if anyone had any recommendations or smart way to use money in my 401k now. I am 37 years old and not as excited to wait on money sitting in my company 401k plan. Currently there is about 50k (IRA, already paid taxes on it) in it and I feel that I am wasting the opportunity of that money by having it just sit there and am interested in somehow finding a way to use it for a vacation rental home.

I was trying to learn a little about converting this into a Self directed Roth IRA but as I'm learning more that basically I couldn't use this in the way that I would intend, which is really just using the vacation rental property as passive income. Are there any other types of strategies or things I can do with this 401k plan in relations to investing in a vacation rental property?

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Daniel Murphy

Financial Advisor · Saint Paul, MN · Member since 2016 · 190 posts · 143 votes

The reality is that by the time you retire, you will likely have a handful of different investments. This is good. Everyone inherently knows that diversification is good, but people don't often think of "product" or "tax" diversification.

You can look at a handful of options that are available with your 401k. Withdraw to buy RE, take a loan to buy RE, move to a self direct IRA to buy RE. You'll find that many of these options are not the most advantageous.

Your 401k was set up with IRS incentives to do what it's doing, sitting there growing until you're older. My best suggestion would be to find ways to continue to build up assets outside of your IRA to invest in RE, then just let your 401k sit. At most, I would consider taking a small loan from your 401k for a down payment, but even that makes the numbers hard to work.

Fast forward 10-20 years & hopefully you'll have a bunch of RE investments which can have a big impact on your taxes. This is when it could make more sense to start withdrawing from the IRA/401k, when your taxes are lower & more controlled.

I'm staring at a tax return from a RE investor who has ~$150k in taxable income for being a realtor. Plus income from 12 rental properties. Add everything up, and his taxable income is $633.

He has a total income of over $200k & his taxable income is only $633. Next to nothing! This is the true power of real estate investments. When you get to this point, you can withdraw from your IRA/401k virtually tax free. Patience is key...

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @Brian Davis:

I wanted to know if anyone had any recommendations or smart way to use money in my 401k now. I am 37 years old and not as excited to wait on money sitting in my company 401k plan.
Currently there is about 50k (IRA, already paid taxes on it) in it and I feel that I am wasting the opportunity
An active 401k where you are still employed may be borrowed against but that's about it. I wouldn't necessarily get a 401k loan, just saying that's about the only option to get control of some funds.
IRAs are different. You may be able to withdraw Roth contributions without penalty or tax. You may be able to get a self-directed IRA custodian to invest in RE.
But I wouldn't hold RE in an IRA. Lots of rules and no depreciation. It's already tax advantaged owning regular.
I would lend from an IRA or retiremnt plan, maybe flip, but not hold.
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Daniel Murphy
Financial Advisor · Saint Paul, MN · Member since 2016 · 190 posts · 143 votes
3y
The reality is that by the time you retire, you will likely have a handful of different investments. This is good. Everyone inherently knows that diversification is good, but people don't often think of "product" or "tax" diversification.
You can look at a handful of options that are available with your 401k. Withdraw to buy RE, take a loan to buy RE, move to a self direct IRA to buy RE. You'll find that many of these options are not the most advantageous.
Your 401k was set up with IRS incentives to do what it's doing, sitting there growing until you're older. My best suggestion would be to find ways to continue to build up assets outside of your IRA to invest in RE, then just let your 401k sit. At most, I would consider taking a small loan from your 401k for a down payment, but even that makes the numbers hard to work.
Fast forward 10-20 years & hopefully you'll have a bunch of RE investments which can have a big impact on your taxes. This is when it could make more sense to start withdrawing from the IRA/401k, when your taxes are lower & more controlled.
I'm staring at a tax return from a RE investor who has ~$150k in taxable income for being a realtor. Plus income from 12 rental properties. Add everything up, and his taxable income is $633.
He has a total income of over $200k & his taxable income is only $633. Next to nothing! This is the true power of real estate investments. When you get to this point, you can withdraw from your IRA/401k virtually tax free. Patience is key...
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Ben Scarborough
Realtor · Gulf Shores, AL · Member since 2020 · 153 posts · 76 votes
3y
If you plan to take a 401k loan and use most or all of what you have in the account, I would highly recommend buying a value add property with the intention of cashout refinancing on it to pay back the loan as quick as possible, unless you find a property that you are very confident will pay back the loan with its cashflow in a timely manner. Please reach out if there is anything else I can help you out with!

-Ben Scarborough
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
You may want to see if your employer allows you to take a 401k loan of which you can take the lesser of $50,000 or 50% of the vested balance.

This amount can help towards a down payment of an investment property.
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