What to do with my 401K?

85 Replies

My situation is that I'm 45 years old and I have a 401K with my current employer. They match 100% up to 3% then 50% up to 5%. 

So I contribute 5% and get 4%, immediately vested. 

I've been contributing this for about 13 years. I've got a balance of about $135K and I still contribute my 5% each week. I'm putting in about $4K/year getting another $3100 from the company. Nothing groundbreaking and that leads me to my situation. 

I'm now about to get into REI and trying to figure out the best plans for this $. I don't intend to leave this employer real soon but I do plan to be able to leave the job in 3-5 years.
I know I'm being optimistic that I can go from zero REI experience to financial freedom in 3-5 years, but I'm not saying I'll be sitting on a beach in that timeline, I know I'll be working, just want to be working on my own wealth and business/investments rather than someone elses. 

Other than the Hardship options I can't access any of it as long as I work for this employer. I know if I were to buy a new property to actually live in that would allow me to access some with a 10% penalty for the down payment but moving is not in the short term plans due to family. 

My immediate question is should I continue to contribute or put that $ towards my reserves where I'll actually have access to it when I need it? Or have it to put towards a Marketing budget? 
I know can't roll it into a solo or IRA or anything while I'm employed there.

I've looked through the Blogs and forum posts and have found lots of information but trying to put it all together to figure out what my options are has been tough to filter out. I noticed most of the blogs I came across were written by @Jeff Brown and his comment that it takes 10 years of doing something to be an expert resonated with me and makes it obvious that all the reading I can do will not give me the advice I need in the short term. Hoping there are some experts out here that can point me in a direction. 

I feel like the answer to my question is obvious, keep contributing and getting that free money the employer puts in. We're not talking about a lot of $ on a weekly basis and it won't have an impact on my current expense structure, but I could also put it towards marketing or simply into reserves. 

I just want to hear some expert opinions on making better use of that $ as I'm starting my REI career.

Thanks in advance

You know I knew that before I hit Post @Aaron K.

Sometimes just putting down on paper (on in a forum) is all it takes to see the answer right in front of you. 
I was tempted to not even post after I read it to myself and saw the answer was obvious but figured I took the time to write it so it was worth posting 

Hello and welcome to this site and asking your question Derek!  Just so you might think that I know what I'm talking about is that I m currently 61 years old and could be thought of as opinionated.  The first thing I would suggest is to know all of your 401K options, which you may already have.

Would your company allow you to put all of your 401K money into a non-taxable account and not just in a tax-deferred account?  In other words, can you get the tax taken out now instead of owing it later if you retire and want any money?  There is a minimal taken out minimum clause that the government has now.  I think it starts at 691/2 years of age.

You can then get funds out that may not be taxed or penalized if you need them or are subject to the minimal withdrawal.  The tax is not going down from retirement funds.  They might just go up.  You maybe a brainwashed government worker and trust the government too much.  They want to take your money and do not want you to save all of it.

I would try to save at least $100,000 for the getting into real estate not including anything for marketing that varies from what you decide to do and the economy at that time. You might need %5,000 TO $20,000 or more for marketing.  You might see a 401K account favors the stock market, the employer tax savings, or the long run positive effect to the government collections.

It's mostly depends on how you see the government and/or the employers and if they really do anything for you positively or just their own pockets.  Remember, that a 401K account is just a piece of paper made out for you.  They do not represent any cash you can get today. You might see if you can borrow from it, when it's due, and can you set the rate?  This might be another good reason to have a tax-paid 401K account. 

You may do better keeping your money outside of the 401K account.  The presentations they do not show usually all of the fees they are charging and that usually takes your real return down very much.  I don't mean to sound so negative but that is currently how I feel.  It maybe because of my being bedridden for over 7 years from some medical issues I had that were totally unexpected at age 54.  I'm lucky because my wife has stuck with me and our daughter has turned out so well and she has only one semester left at the University of Arkansas.

Making as much or more money in your savings is kind of like real estate in that it may take a little more work and if you have that time.  Since I'm bedridden, I read a book about every 2 weeks and some of them effect me more than others.  

One guy I listen to regularly on YouTube is a man that owns more than 4,000 apartment units and pushes them pretty hard and talks much about how good apartment ownership can be and discusses the importance of saving $100,000 before you get started.  He tends to push you to invest with him and how apartment buying and selling is the best way to go right now.  I think he just turned 60 but and he has alot and is very dedicated to his work and family.  He has said he is expecting to make about 150 million on this year.

A few more things about me that may help you to believe in what I say.  I have about 30 years of experience in construction management and about 30 years as a licensed real estate broker license in the state of Texas.  I did graduate from college with honors in business that emphasized real estate.  I am from and raised in Dallas, Texas.

Good luck to you!

I first want to qualify my response with I am not an expert. Just a pragmatic thinker. I Could not agree with Aaron more. Right now your match is free money and I would increase what I was contributing to first get you to the 5% match. You will never even feel it but it does add more free money to your overall 401K amount. Additionally this will lower your taxable income a little bit more. Even if its 1% more why not get it. After that it sounds like your not even close to reaching the allowable amount of IRS pretax savings. Based on your comment above, I think you have two options. First, you should talk to a Certified Financial Planner who is a who is a Certified Fiduciary and see if you can open up an additional self directed IRA to continue saving money pre-tax. After you have saved a little in your SDiRA you can begin to passively invest in a whole host of real-estate investments that pay 12%-16% returns and the dividends go back into your self directed IRA tax free. IT also gives you an opportunity to learn real estate investing from the inside out. Only do business with reputable Sponsors who you know, have an established track record and ask to see all of the underwriting of the investment. If they balk at any of these questions run. Second option, is to just save post tax into your reserves account for your own business. You could still use those dollars to passively invest in real estate deals now and you will benefit from double digit returns and you would be eligible for some of the depreciation of say a Multifamily complex. This is where you need to make sure your syndicator or sponsor does a segregation study to know exactly what the depreciable amount is and what your share will be. This will lower your tax rate on the returns of this type of investment. But it is also a way to develop mentors and learn the subtleties of real estate investing and ownership. Just my thoughts. I wish you the very best. You sound determined and reasonable keep asking questions and educating yourself as much as possible. Never lose sight of your dream even during the slow periods and you will make your goal of financial freedom a reality.

@Michael Lee Thanks for your insight. As of right now I'm pretty well locked in but I need to talk to the Rep that administers our plan to confirm. Once I leave the company I'd obviously have options. I'm not a fan of loaning the government money at all so I completely appreciate where you're coming from. I will do some research to verify my options though. 

@Scott MacDowell To clarify I'm getting the max I can out of the employer. By my putting in 5% they put in a total of 4%. Anything more I add they won't match. I will need to talk to a planner but if I confirm I can't touch the $ anyway then I'm pretty locked in to it for now. Using a SDIRA is something I've looked into for when I'm able to move it so I could use it for Real Estate. Multifamily is the segment I want to get into as early on as I can. I'm wanting to BE the syndicator at some point but obviously have to gain some knowledge and experience. And of course grow some Capital. 

@Alex Bekeza thanks for the referral

@Dmitriy Fomichenko Yea I know for now the best course of action is to keep contributing to get the free money. 

Time to set a plan to get myself out of the rat race in a few years, or quicker, by then this money may not even be a factor as it'll be small change compared to what I'll be working with :)   

@Derek Tellier

If your goal is financial freedom before retirement age, a solo 401k or a 401k is not going to get you there as you cannot use that cash today.

I would rather store money into a vanguard taxable account where you can use the money. Or you should research a whole life insurance policy on yourself or family members where you overfund the Policy.

I think 401ks are great if one wants to work at their job until 65, but your money is locked up.

Thanks!

I'm brand new here in the forums and am glad you posted this! I have had the same question for a while now. And great to read everyone's thoughts as well.

I've always been sold by the "free money" with a company match, but I'm always tempted to explore other options still, glad others are thinking through the same questions I am.

It's often frustrating to look at what I have sitting in a 401k and think "I can't do anything with this until way down the road!" Even so, good to be reminded to carry on, take advantage of the company benefits until it can roll into something else I can potentially get into real estate with.

Mason Fiascone

@Mark Welp I agree, the mid term plan is I'm confident I'll be able to get a better return on that $ myself, unfortunately by the time I have access to it and have to pay the taxes on it I'm probably giving away what my employer contributed and in the end it was a glorified savings account. Truth be told up to this point it was probably a good thing for me as it took me 40+ years to realize I really do have to control my spending and "save" if I want to be able to be free at some point. I have no plans to "work" till I'm 66 or whatever age it will be by the time I get there. Once I can get to it then I'll figure out what's best to do with it. For now I'll keep putting in the contribution to get the employer match. 

@Mason Fiascone , glad I could help

@Derek Tellier I’m another vote for don’t touch your 401k and continue to contribute to get your full employee match. You’ve got a great match program! I only get 50% matched up to 4% (i.e. a full 2%)...but I still contribute 13% (and working to max out the $18.5k) while building downpayment for new rentals. It’ll take me longer to build a down payment but once I max out my 401k then any extra will go to the down payment fund...it snowballs from there. Keep contributing (at least to get that guaranteed 100% return)

@Derek Tellier Since you didn't mention it before, we wouldn't know, but it's worth looking into: have you had any jobs before this one? Did you have 401k plans in the past? If so, where are these funds now? Consider rolling it over to solo401k (as long as you're qualified).

Best!

@Derek Tellier Then another option for you to find funds to get started is to get a life insurance and to borrow against it. I would not touch your current 401k under no circumstances as most people here universally stated so. Alternatively, if you own a home, then maybe you can cash out/refi it or get a HELOC on it.

Best!

@Mike Dymski Have already been told no to that one, only for hardships per federal guidelines, So unless I buy a new primary or decide I need it for my daughters college education next year I can't get a loan off it. 


@Alina Trigub I actually have a Heloc already but it was used to improve on the house over the last few years, I've not been particularly smart financially up to this point so I have a hole to get out of. 
I do have more equity in the house and I planned to look into either doing a Cash Out Refi to pay off the existing Heloc and gain additional capital OR possibly just look at doing a new Heloc with a higher limit if I can. 
All things I plan to talk to some lenders about soon. The Life insurance is also something I need to look into 

Thanks for all the tips 

@Derek Tellier I’m in the same situation as you. The first thing you want to do before moving any money around is to increase your contribution to 8% annually, whatever is company match whether it’s 100-50%, nothing in this world will give you that instant of a return. Then formulate a strategy on what types of REI you want to do. I’d suggest networking with those that are in the same field and have transitioned to being a REI, they most likely will have the same concerns you had. Lastly, ask your 401K Admin if you are allowed to roll VESTED dollars into a “Self Directed 401K”, you can google it and get a ton of FAQ. Essentially think of the best of both worlds. You use your retirement income to invest, it carries less risk since loans have to be non-recourse. And ALL Gains are TAX Deferred. Only distributions are taxed. It’s a way to exponentially get better than the average bull run of 12% per year, which is what we’ve seen in equities for past 5 years. My 2 cents.

Account Closed, increasing my contribution won’t get me any more from the employer. I’m maxed at what the match already. 

I will ask the admin about the SD 401k. Based on the info he previously gave me and what I read on the website I don’t think I can but it won’t cost anything to verify that. 

@Derrick Tellier Neither option that you've pointed out is necessarily a bad choice. That said, if it were me, I'd keep contributing to the 401k, if only to take maximum advantage of those employer matching contributions. How often in life do we get free money? Rarely, so it's something to jump on. I'd be taking advantage of that for as long as possible, and maxing out the contributions if that was an affordable option. You're correct that you can't roll over those funds while you still work for this company. You can, however, roll those funds into a Self-Directed IRA LLC or SoloK when you leave.

From there, it's easy to self-direct those funds into the real estate investment of your choosing. Fortunately, you dont need to be an expert to succeed at self-directing. There are many professionals (CPAs with IRA backgrounds, financial advisors, attorneys) that have done this homework for you. Make use of them. This doesn't have to break the bank, either. There's another free resource you're already using to help you too: your investing community. Hell, you're doing it right now just by posting on BP!  But you can also get some expertise from your local community, especially if that's where you plan to make your investment. Never underestimate the power of the network. Getting advice from someone that has sucessfully done what you plan to do can be one of the best ways to make sure you get started on the right foot. And that advice is priceless, in every sense of the word.

@Derek Tellier Neither option that you've pointed out is necessarily a bad choice. That said, if it were me, I'd keep contributing to the 401k, if only to take maximum advantage of those employer matching contributions. How often in life do we get free money? Rarely, so it's something to jump on. I'd be taking advantage of that for as long as possible, and maxing out the contributions if that was an affordable option. You're correct that you can't roll over those funds while you still work for this company. You can, however, roll those funds into a Self-Directed IRA LLC or SoloK when you leave.


From there, it's easy to self-direct those funds into the real estate investment of your choosing. Fortunately, you don't need to be an expert to succeed at self-directing. There are many professionals (CPAs with IRA backgrounds, financial advisers, attorneys) that have done this homework for you. Make use of them. This doesn't have to break the bank, either. There's another free resource you're already using to help you too: your investing community. Hell, you're doing it right now just by posting on BP! But you can also get some expertise from your local community, especially if that's where you plan to make your investment. Never underestimate the power of the network. Getting advice from someone that has successfully done what you plan to do can be one of the best ways to make sure you get started on the right foot. And that advice is priceless, in every sense of the word.

I agree with @Mike Dymski to take a loan out on your 401k if you can, you can borrow up to 50% of your total amount, up to 50k, and the small interest you pay of 4.5% or so is paid directly to you. If that is not an option, I'll leave an option no one else has stated. I do like contributing to a 401k to get the match, but by all means, if you have an amazing real estate deal that will earn you huge returns, by all means blow up that 401k. You can start contributing again in 6 months, take a hardship withdrawal. Now, hear me out (I can already hear people saying what is he talking about, you can't do that, or no you can't taste the forbidden 401k fruit, how is he going to do this?). Go enroll at a university and submit for a school hardship withdrawal to pull of 20k or however many classes you can get scheduled in a year. Then, perhaps consider seeing if your employer will reimburse you for the classes, you can even get student loans and use that extra money toward real estate. Just make sure you receive your hardship withdrawal before applying for loans etc. Now, people might be thinking, a rental property is not a hardship; I argue if you currently have a negative net worth, it is a hardship, so go get your money. If you are looking for outside the box real estate creative financing ideas, there you go. You even get a degree or some upper level classes under your belt, take some classes you enjoy.

Updated almost 3 years ago

*pull out 20k

To do what you are trying to do, I made sure I got the employer match till I quit and cashed out everything (110 k). I did my own taxes, didn't report that I owed them a penalty, and signed up for the IRS installment plan. The interest is like 6% of whatever taxes you owe. That money and my own sweat was enough to get a do it yourself real estate business going. This was 2013 and it may take more money than that now. It wasn't that hard and my passive income is way higher than the 401k plan would pay even had I worked another 15 years.