Has anyone cashed out their 401k? You would have to pay a 10% penalty plus you pay federal/state taxes. Any comments is it too risky or risky not to do it?
You should look into self directed ira's I believe there is a way to use these to finance real estate transactions.
Depending on what you are using the money for, and also depending on the parameters established between your employer and the administrator of the 401k, you may be able to take a loan against your 401k rather than cash it out.
I took an old 401k and put it into a solo 401k for real estate. That is how I invest. I buy 50-60k houses and owner finance them, I also have some TKs in Kansas City I like.
Hi Lane K. stated I have used a 401K loan to purchase 2 multi-family properties and most likely a third in 2015. I believe every employer can vary a bit but I am able to take out a max of 50% of the value in my 401k or a max of $50,000. I also have a limit of 2 loans which can be taken out at any given time. If your employer supports the 401K and you are responsible with your money this is a great tool to help new investors which might need funds to execute on a deal.
Best of Luck,
@Scott Dixon what are the terms on your 401K loan?
Hey @Justin Cooke
For general purpose loans (everything other than primary residence) my company allows a 60 month term with give or take 4% interest being paid back to you into your 401K. The only cost I have is $75 - $100 for processing fee.
@Scott Dixon On the 401k loan I think most companies will not allow this because they it want it to be on a primary residence not a non-owner occupied transaction? Was this the case. Did you just seller finance the whole thing? I'm all for leverage but if you lose your job then the cards can come tumbling down. Also the 5 year amortization is a short period what is your plan there?
@Joshua Swanger mentions getting a non-recourse loan with with a rolled over 401k/IRA. This an option but the terms are not that great and therefore a secondary option to a conventional loan - not to mention the PITA required in deciding which part of the loan needs to be paying UBIT taxes. Thus is why I am thinking paying the 10% penalty an being able to use the money in a conventional loan is better.
@Account Closed I think you can only convert your 401k into a solo if you are not at that original company that sponsored the original 401k?
Check out rolling over your 401k into a self directed 401k plan for real estate investing. You can check out the benefits on You Tube of the program with David Cole. I did it myself and am investing in real estate as an investment. There is a 5 year pay back period without penalty and I believe it is way better than taking out a loan against it as you mentioned. It is also protected from law suits using this program instead of the IRA which can be attached. David Cole can also be checked out on google. He is also a real estate investor and available to advise you without charging you. Good luck and happy investing.
Also you have checkbook control with the program which can be used instantly without going thru administrators.
Hey Lane K.
I can't comment on other 401K plans other than the one I have dealt with over the past couple years with my employer. In terms of the risk associated with a lose of your job this could be an issue and will have to be taken into consideration with your own situation and risk tolerance. Nothing is 100% but for my job I feel that this is a risk that I was willing to take on for the associated reward. I can get a "general purpose" loan which has the shorter term (60 months max) opposed to 117 months max for a primary residence loan. The 60 month term is short but I take this into consideration while doing my analysis of the properties I am looking to acquire. If the property can't pay for the 401K loan, 30-year fixed interest loan, insurance, property tax, normal repairs, and a little set aside for capital improvements then I won't do the deal. With this said most of the cashflow gets taken up by the 401K loan and my cashflow doesn't really kick in till 60 months when the loan is paid off. This is my own strategy and revolves around securing large assets (200K plus) with 30-year fixed interest loans all out of my own pocket without partners. This is not for everyone but just my own personal strategy and what I prefer over putting all of my retirement in the stock market.
Best of Luck
10% penalty plus tax is huge penalty. Use it as last resort. There are ways to get to use the 401k money (often have restrictive investment choices) for other investments. E.g. if you switch to a new company, you can turn your 401k money to a Self-Directed IRA money, where you can invest in almost everything (there are restrictions of course).
Thanks for the feedback. I cannot do a loan since I already have one and maxed out on that plus I am still with the original employer. I disagree that the 10% penalty is huge - if half of the money was employee matched contributions then it was free money anyway. Look it at the sunk cost perspective???
What difference does it make whether 1/2 the money was free or not? That's an unsophisticated perspective to justify doing what you want to do, but under sunk cost theory it really doesn't matter.
Another factor that I don't believe has been discussed here is the liability protection of having your assets in a retirement plan - they generally can't be touched by creditors or judgments. You could set up alternative asset protection entities, though.
Why do you need this money?
If the need isn't urgent, there's no reason to sacrifice money that would otherwise be yours.
I'm just looking at it from a sunk cost/ROI prospective... If I have to take a 10% penalty to acquire a property that makes a conservative 25% ROI/year then whats the issue. I respectively request some feedback in other than "my idea sucks".
Timing matters. If I were in your shoes and there is no urgent need for this money, I would instead roll your 401k into a ROTH IRA. I believe you can then withdraw it as if it were a regular contribution after 5 years without penalty. You'll want to talk to someone who's a little more knowledgeable on this particular subject if this is a path you want to take.
Also, sunk cost is a cost that has already been incurred and thus should have no impact on future decisions you make. You have not spent this 10%, it is not a sunk cost, and sunk costs have nothing to do with this discussion.
If you truly believe that your 25% return is long-term sustainable, then by all means, do your withdrawal, pay your penalty and reinvest it. But return = risk. I'd be very suspicious if you came up to me on the street and promised me consistent 25% annual return. Also, your 25% ROI now becomes taxable income. I think you'd have to do incredibly well for a sustained period of time to make up for the tax penalty of the withdrawal.
I didnt read through all of this thread - however I have done the same when the stock market was tanking -- the company fund my employer was maintaining managed to lose no money so that was a plus -- however I was tired of the consistent 0% return and took a loan out for some investment real estate.
It might vary from company to company on the terms - however I'm sure most is set by the IRS --- what I've found out is that you can take out the max of 50% of the value of the 401k or $50k whichever is less -- 5 year payback period for anything other than the purchase of a primary residence (they will give you a 10 yr payback period on that)
One caveat I recently learned about on the $50k max loan -- is that when you look back the trailing 12 mos, you can have had no more than $50k outstanding.
SO maybe this will make sense -- I used my 401k last year as a temporary short term loan - needed cash quick to redeem a property - so took $30k out to complete the purchase in cash when partnered with others funds. Was able to get bank financing for rehab and to pay back my 401k loan within about 45 days so paid the $30k loan back. Recently I found another good deal - wanted to take out the full $50k as a downpayment (which I'd pay back quickly with bank financing) however was unable to do so and would have only been able to take out $20k until 12 mos had passed since the loan balance returned to 0.
Hope that makes sense and maybe gives someone a little insight into how this works.
Lots will say not to do it -- I did and it worked great for the short term. I wouldnt hesitate to do it again. Only cost me $75 for the loan fee from the 401k administrator (and I guess whatever lost gain in the 45 days the money was gone - however the stock market did not go up more than the 3 or 4% interest I had to pay to myself during the time the money was outstanding.
The company I work for will allow 3 or 4 loans outstanding at any one time. However the lending limits are what I described above and sound identical to another poster in this topic.
This post has been removed.
To learn more about the 401k loan rules, see the following:
This post has been removed.
I am curious as to what you decided to do regarding the 401k? Did you decide to go the early withdrawal path or the SDIRA path or keep things the same?
I am looking at splitting my available retirement funds and putting half into a deal that will provide significant cash flow now even after paying the penalties and taxes for the early withdrawal. The other half I will leave in the IRA and will start rolling into a Roth next year. At this point I am not planning on having this half invested in real estate.
It seems like there is less potential for error with an early withdrawal than with a SDIRA. We are pretty hands on and we are concerned we would make a mistake along the way that would disallow the entire thing.
Our objective is cash flow in the near term to provide more family time and flexibility while we are young enough to enjoy it and our kids are young enough to still want to hang out with their parents.
This is a lot of great information! I am contemplating on cashing out my 401k that has less than 12,000 to invest! I think it's worth the sacrifice...thoughts?
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing