How to utilize $9k in a 401k

Question

I have abt $9000 in my 401k from jobs. I would like to enventually use it towards real estate investing first purchase downpayment, once that opportunity arrises. What is the best method for this?

Have been reading up on this a bit and it seems if I get it into a roth ira it can be used for downpayment funds eventually with lower taxes removed?

(If this question correlates better to a different forum thread lmk).

Basit Siddiqi · Answer

In my opinion, a 401K is a retirement account just as real estate. So you are just choosing one retirement vehicle over another.You can also consider rolling the 401K into your new employer and take out a 401K loan if your employer offers the option.You would normally be eligible to take a loan of the lessor of $50,000 or 50% of your vested balance which would be $4,500.Best of luck

Ben Stanley · Answer

I don't "have to" use that money. My 401k is not the only funds I have, rather I want to utilize that money to invest while I am young. That kinda of money is better used as part of a downpayment or investing with rather than holding onto for years in hopes of using it later for retirement.

Josh St Laurent · Answer

Ben, a few thoughts.  You can typically borrow half of your 401k balance as a loan as long as you are working for that company still.  If not you can rollover your old 401k(s) into a new 401k.  Another option would be to look at a self-directed IRA where you could use those funds to make the down payment directly from the IRA.  The last thing that comes to mind would be moving the funds to a rollover IRA and withdrawing them with help from your tax advisor or CPA to qualify for the first-time homebuyer exemption.  You would still pay taxes but the 10% early withdrawal penalty is waived for the first 10k.

John Bowens · Answer

Great question Ben and very common. How to use a smaller amount of funds in a retirement account to invest in real estate? First, the 401k funds must be from previous employers so you are eligible to rollover to a Self-Directed IRA. Let's use the balance of $9,000. You might consider (Check with your tax professional) to convert any pre-tax funds, to a Roth IRA. This is known as a Roth Conversion. Reason being, you can pay taxes on the smaller seed so you never pay taxes again on profits or distributions during your retirement.

Now, onto how to use these funds? If you can find real estate opportunities and money partners, you can potentially put these funds to use, tax-free in a Roth IRA. Think real estate joint venture. Please note, you can't do this with your non-IRA money, your businesses, trusts, children, grand children, spouse, parents, or grand parents. See IRC 4975 who are disqualified persons. This strategy can only be done with a non-disqualified person.

Example: I have a client who only had about $13,000 in his Roth IRA, found a fix-and-flip opportunity, and needed $105,000 all in, for purchase and rehab. He partnered in a joint venture with a financial money partner for the full balance needed. They negotiated a 50/50 split of the net profits. The $13,000 Roth, grew to $47,000 tax-free after the sale of the property ($34,000 tax-free). Caveat: Rule of thumb is to not do more than 1-2 of these short-term transactions, otherwise, you could trigger UBIT.

Or you consider slow and steady options, such as partnering your IRA funds with other money sources. For example, I have a client recently that partnered his HSA at 4%, Roth at 80% and Trad account at 16% on a $193,000 loan. He is charging 14%, which is being split 4%/80%/16%.

Hopefully this helps you with some ideas and concepts.

Bill Hampton · Answer

@Ben Stanley

If you have to use 401k funds for a down payment, then you are not financially ready to buy a house.

Please save enough money so you don't have to touch your retirement accounts for the down payment.

Also, make sure you have an emergency fund to cover six to twelve months of expenses before you buy a house.

Good luck.

Jonathan Bock · Answer

@Ben Stanley

Get liquid first start by saving money in a taxable account

Josh St Laurent · Answer

If you rollover your 401k pre-tax money to a rollover IRA and then withdraw it from the IRA it will be taxed.  You can get up to 10k PENALTY-FREE which is 10% on top of taxes.

If you use a Self Directed IRA (SDIRA) you may be able to use the 9k as a down payment but I would argue this is going to be more complex, especially as a first-time investor.  Check out this BP Article on using an SDIRA - https://www.biggerpockets.com/blog/self-directed-ira-real-es...

Ben Stanley · Answer

Good to know. The 401k is from a past job so probably will go the IRA route. So if I transfered all of it into a rollover ira, then I could use the entire amount I have currently as tax-free towards a first time buyer loan?

How to utilize $9k in a 401k

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