How to use my 401K as a down payment?

Question

I have 30k in my 401k from before I knew that real estate would retire me. I want to use it for a down payment. I know I can loan against it but I'd rather not as to not hurt my cashflow. I can take it out directly but will lose a lot of it to taxes. What would you recommend I do? Am I missing something? anything helps thanks!

Paul Novak · Answer

I agree it will hurt your cashflow short term but I have done this multiple times and I personally like this strategy.

To be clear I am already Coast FI so using the money in my 401k won't impact my long term retirement goals and like you my focus to reach FIRE is based on cashflow from my real estate.

What I like most about this strategy is while I am out the cashflow short term I pay the interest back to myself.  When taking out this type of loan my and my wife's 401k loan fees are a bit different.  My fee is $10 per quarter that I have the money borrowed.  My wife's fees are a one time $75 origination fee.  We can borrow $50K or half the balance which ever number is smaller.  In our case this allows us to borrow $50K.  My interest rate on these loans has been around 9% which seems high until you realize that you are paying the interest back to yourself.  In this manner I have used my 401k's as the bank to fund my investing.  Borrowing $50K has resulted in reduced pay of $479 per bi-weekly paycheck to pay it back over 5 years.  We have always paid it back much faster.

One watch out is the money is owed back to the account quickly if you lose your job or quit.  I have a HELOC that I use as a backup plan if I would need to pay the money back quick.  If you have any additional question on this strategy let me know and I will do my best to help answer your questions.

Teresa Boykin · Answer

As others have said, you can roll it into a self-directed IRA and invest in real estate that way. Once you get that in place, then any profit you make will flow into your IRA and grow either tax-deferred or tax-free depending on the type of account you have.

Keep in mind that there are specific IRS rules for holding property within your IRA that you'll need to follow, like how it can't be used by yourself or certain family members or that you can't do any renovations yourself as that would be considered "sweat equity."

Your custodian or tax specialist should be able to help you understand these rules.

Another benefit of using an SDIRA is getting a non-recourse loan to help buy the property. The rates may be higher than other types of loans, but they only recourse if you default is the property itself, so the rest of your assets are secure.

Ashish Acharya · Answer

Good question. From a tax perspective, pulling the $30k directly from your 401(k) would trigger income tax and a 10% penalty if you’re under 59½, so you’d lose quite a bit upfront.

A 401(k) loan avoids taxes and penalties as long as you repay it, but yes, it can affect cash flow. Another option is to roll it into a self-directed IRA, which lets you invest in real estate without withdrawing or paying penalties.

That route keeps the tax benefits while still putting the money to work in real estate. You're thinking the right way and asking the right questions. Happy to connect.

Basit Siddiqi · Answer

Your options are as follows(Depending on if you are still with your employer and if they allow loans)1. Take a loan of up-to 50% of the vested balance2. Distribution(Subject to income tax and potentially a 10% penalty if below the age of 59.5)3. roll it over into a SDIRA and invest in real estateBest of luck!

Jason Malabute · Answer

If you’re under 59½, be careful about taking a direct withdrawal from your 401(k) for a down payment. The IRS generally treats that as taxable income, and you’ll also get hit with a 10% early withdrawal penalty on top of the regular income tax. That’s why most people prefer to take a loan against their 401(k) instead—it doesn’t trigger taxes or penalties as long as you repay it on time.

Jason Taken · Answer

Talk with your custodian about taking a loan against your 401(k).