What to do with my 401K?

Excellent idea's!!! I am in the same boat pretty much. I want to use my 401K for REI when I do finally retire.

Abby Ruppert

Real Estate Agent · Tampa, FL · Member since 2018 · 83 posts · 27 votes

Free money is good money! I would contribute the minimum needed to get the full match contribution from your employer. Also look into loan options. Many 401ks offer loan programs where you do not pay an early withdrawal penalty, just maybe a $50 processing fee, and the interest which is paid back into your account. Keep in mind, if you do separate from your employer in 3-5 years, and you still have the outstanding loan balance, you may be responsible for paying it all off or facing the 10% early w/d penalty on whatever is still outstanding.

Stephen G. Wolff

Rental Property Investor · Minneapolis, MN · Member since 2018 · 23 posts · 10 votes

Originally posted by @Gordon Starr:

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.

Reply: Is this a real post? SMH

Frankie Woods

Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes

Like others have stated, keep contributing up to the match. It's free money and a guaranteed return. Additionally, you can borrow up to 50% or $50k (whichever is the smaller amount) from your 401k without a penalty. You will have to pay an interest rate (currently about 3%), but you are paying yourself. I'm in the process of doing this myself for a downpayment with a conventional loan.

Scot Howat

Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes

If you're putting in 5% and your employer is putting in 4%, then your employer is funding ~45% of your retirement. If you bought a bad rental property and ended up netting $0 profit every year, then your tenants would be funding 80% of your retirement (assuming you put down 20%).

Would you rather take the 45% contribution, or the 80% contribution?

And we all know, that if we cost effectively manage and maintain our portfolio, then the tenants will end up paying for more than 100% of the property (over time).

Bernard ReiszPro Member

CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes

@Derek Tellier

To add some helpful (hopefully😀) context to what's been said:

Free employer match vs real estate ROI: Even though you would probably do much better in real estate, it's not definite. ROI's should be considered on a risk-adjusted basis and the employer-match is risk-free.
However, comparing the ROI of employer match to potential ROI of a single real estate investment is a very narrow approach. The potential ROI on the real estate may be infinite. If this is an either/or scenario, you may not want to throw away your ticket into real estate investing. Your initial foray into real estate is a conduit for doing so much more...
The life insurance option is a great choice if your looking to accumulate value for future investing. Bear in mind that if you need that money to fund a deal in the near future, you'll regret the life insurance. On the other hand, if you stay in cash and don't fund a deal for a while, you may regret not having the life insurance (life insurance is a complex and hotly-debated topic, feel free PM for greater detail).
Of course, it all comes down personal choice, personal expectations, personal financial profile....

[email protected]

3 Reply

OP

Real Estate Agent · Sevierville TN · Member since 2018 · 305 posts · 224 votes

Had no idea this were turn into such a hot topic.

@Bernard Reisz I actually have a term life insurance policy now but will be looking into other options for it later this year.

My question that started all this was really just about continuing to contribute vs not. I’m pretty sure I can’t do anything with the funds themselves although I need to find out if a loan is an option in the future though.

I’m confident that I can come up with other sources to help with down payment, etc should need it. But I’m a couple months away from being in a position to actually start making offers anyway.

@Frankie Woods I need to look into this for sure.

@Scot Howat I agree but I’ve got to see what my options are. Tapping into the 401k isn’t my first choice by any means but it is good for me to know if it’s at all an option.

Bernard ReiszPro Member

CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes

@Derek Tellier

Some things are always hot topics on BP - self-directed retirement accounts (BP general sentiment: in favor) and cash value life insurance (BP general sentiment: opposed) are among those.

(Almost) All financial tools have an appropriate time and place. Leverage BP to make yourself an educated consumer and get input from the most dynamic RE investor forum.

[email protected]

Michele B.

Vandalia, MI · Member since 2018 · 569 posts · 264 votes

Option 1 move it to a SOLO 401k

Option 2 find a company that can loan out of your 401k with you staying at the job...YES this is possible. You have to pay back with interest.

Good Luck!!!

Tag me if you have any more questions.

Laura Shinkle

Realtor · Charlotte, NC · Member since 2017 · 357 posts · 292 votes

Hi @Derek Tellier,

First off, not an expert. But I listen to a lot of podcasts and constantly try to learn new financial strategies.

I wouldn't stop contributing to 401k. Contribute up to the max match from the company and then save the rest.

From your post I get the impression that your question is not just about 401k but on how to get money to start investing. I'm not sure if anyone else mentioned other strategies on saving money. I listen to a podcast called Listen Money Matters. It's two smart guys talking about all things money. They have a ton of episodes and info on their website about making a budget, sticking to it, how to save for rental income properties and a lot more (one of the hosts is obsessed with buy and hold REI). They interviewed a few weeks ago the CEO of Blooom. It's a company that will help you maximize your 401k to make sure it is invested in the best options your company has to offer given your risk tolerance. I know that doesn't help with a down payment for a rental property but it may help to maximize that employer match. I think there is a link for a free analysis through the LMM website. Here is the link to the website for that particular episode. If you don't like it, it's only an hour of your time lost. It may be helpful for your situation. https://www.listenmoneymatters.com/blooom-401k/

Perhaps a combination of a reducing your living expenses, refinancing your current mortgage (if your wife and lender are ok with it) and saving as much as you can will help get you to your goal faster without losing out on your employer match money. It won't be easy, but no one said it would be. I'm still struggling with all of that as well so you aren't alone!

I don't know your work/family situation but perhaps picking up a freelance job would help save up money faster. An investor in your area may need help with something and would be willing to pay you. Reach out to people in your area. You may be surprised.

Hope this helps! Best of luck with your situation!

Laura

OP

Real Estate Agent · Sevierville TN · Member since 2018 · 305 posts · 224 votes

Thanks @Laura Shinkle I’ll check out the podcasts.

As for your other comments these are all things I am actually working on. Budget and saving are of course key, refi is in the plans this fall and I've joined the local REIA, been to 1 meeting so far and next one is next Tuesday and I'm currently trying to establish what I can offer a local investor that will help me get some experience. As I just heard in a recent BP podcast just offering to do "anything" isn't much of an offer as it make sure them have to figure out what I can do. I need to come offering something specific I can do for them and hope they'd have a need for it.

Laura Shinkle

Realtor · Charlotte, NC · Member since 2017 · 357 posts · 292 votes

Agreed @Derek Tellier, "anything" is not helpful. I'm not sure what your skill set is. But it sounds like you're going down the right path! Best of luck to you!

Bryan Clement

Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes

I have very little experience with this whatsoever so I'm just regurgitating info I've heard from others, I've heard the best plan is to keep contributing until you have a stable REI company, and then you can roll the funds into a self-directed IRA that you can use to fund some deals.

Justin WindhamPro Member

Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes

@Derek Tellier

Regarding whether or not to contribute to a plan, it's pretty commonly suggested to get the max out of any employer match that is offered. Beyond that, it helps to consider what you ultimately want to do with the funds. If you want to invest those funds into real estate, you'll eventually transfer the assets to a self-directed IRA or Solo 401k. Most typical 401k plans don't allow for "in-service distributions," though. This means you usually need to leave the employer before the plan document will allow you to move the funds. It is worth asking if the plan has provisions for in-service distributions, though. If not, and you plan to stay with the employer for a long time, that might be a factor in your contributing less to the plan. With a little future planning, it's hard to go wrong either way, though because of the tax advantages these accounts offer. That said, if you have a really good opportunity to make some high return investments, participating in that rather than contributing more might make sense.

Vitaly Adler

Member since 2018 · 5 posts · 3 votes

@Derek Tellier Some questions I'm curious about: Are you able to contribute more to 401K than bare minimum to collect match ? Why not put aside more if you can and pay less in taxes ? How is your 401 invested ? What kind of fees are you paying ? What is your risk tolerance with regard to financial markets and REI ?

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

Talk to your financial planner. Even if you do now have one you can go to your bank ask for a financial advisor possibly to optimize your return.

Terry Miller

Akron, OH · Member since 2015 · 178 posts · 189 votes

Originally posted by @Derek Tellier:

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

It was a good read. It is beneficial to remind yourself of your plan, I guess. You had to remember "you don't hate money."

John Hickey

Rental Property Investor · Chappaqua, NY · Member since 2015 · 1k+ posts · 947 votes

@Derek Tellier looks like you got your answer.

I would also point out that banks like you to have retirement assets. Depending on how your plan is structured you might be able to take a loan against the 401. I wouldn’t do that. But if you can.....that can count as an emergency reserve.

OP

Real Estate Agent · Sevierville TN · Member since 2018 · 305 posts · 224 votes

@Vitaly Adler I can contribute more but mainly I'm just making sure I get full advantage of the match. 14 years ago it would have made more sense to put more in as it would have prevented me from spending it. But can't change the past and with my current timeline and plan putting more in will just put more $ where I don't have access to it for REI.

As far as how it's invested it's in American Funds 2040, I have it allocated as 40% Growth, 36% Growth & Income, 19% Equity-Income/Balanced and 5% Bonds. Fees there is a "quarterly fee" and an Admin Fee that is also paid quarterly. So far this year I've paid about $640 in fees. This is actually an improvement, they switched to American Funds from John Hancock at the beginning of 2017.

As for Risk Tolerance, it's much higher now than it was when I set up this account. My daughter will be off to college next year and I'm rearranging my whole life. I'll be leaning more towards Risk but will certainly want some "safety".

@Justin Windham No options for "in-service distributions" other than Hardships. I reached out to the admin of the plan today asking if loans are an option. Just so I know as currently it's not my intent to use it unless I really feel it makes sense.

OP

Real Estate Agent · Sevierville TN · Member since 2018 · 305 posts · 224 votes

@John Hickey The loan idea has come up and I'm going to look into it,
Again not that I plan to actually use it but just to know if it's an option should it make sense to have to go there.

Gordon Starr

Rental Property Investor · Dayton, OH · Member since 2015 · 312 posts · 273 votes

@Stephen G. Wolff

wrote "is this a real post?" The answer is yes, it is. Now, what are you driving at? You appear to be giving me some flack but your question doesn't make a lot of sense. Are you very low IQ? I would hate to rip on you if you are really as retarded as your question suggests. lol

Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

@Justin Windham I took my money out of the 401k because even with-the match I could make more. You are going to pay taxes at some point so its a wash. Would you rather be in fake assets or real ones with much higher returns?

Vitaly Adler

Member since 2018 · 5 posts · 3 votes

@Derek Tellier Investing for the future takes a lot of discipline, same goes for running a business. My feeling about target date funds is that they are all scams. They usually charge 1% annually. That's a huge amount of money when compounded over many years. My advice would be to see if a lower cost option is available. At my place of work they offer vanguard funds which charge 0.04% for US index funds and about 0.14% for international index funds. With regard to liquidating the 401 to start your REI business, I have no experience with that but looks like there is a wide range of opinions on the pros and cons.

Dmitriy Fomichenko

Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes

@Lane Kawaoka, you can be in real assets, you just need self-directed IRA or 401k.

True, you will be taxed at some point, however growing your wealth in tax-deferred way versus being taxed every year will make a huge difference on the amount of wealth in 15 or 20 years. And don't forget the Roth, if you are willing to pay the taxes now, you can have Roth IRA or Roth 401k and use that to invest tax-free for the rest of your life. And if your goal is to retire early and access those funds in your IRA or 401k prior to normal retirement age - you can do that as well, there are loopholes in the IRS code that allow you to do so.

Patty C.

Homeowner · CA · Member since 2014 · 125 posts · 33 votes

Hi Derek:

Check with your accountant or financial professional, but one of the options that might make sense is borrowing from your 401(k).

The comparable retirement savings vehicle to the 401(K) in the public sector is the 403(b). If your 401(k) has a loan provision, like the 403(b), see if borrowing from it to buy a primary residence makes sense for you.

The 403(b) currently allows 10 years to repay a loan used to purchase a primary residence. The rate (if like the 403(b)) is reasonable. My custodian currently charges prime plus 1%. The payment is taken directly from the paycheck. If you default on the loan, it's your money so your credit is not dinged. When payment is made, it goes back to your account so it's like paying yourself back. (The custodian must make something on it besides the small fee they charge, but the return on your money will most likely be more than what you would get with mutual funds.)

CAVEAT: If you do not make the payments, the loan balance is treated like ordinary income when it is reported to the IRS. In addition, there will most likely be a penalty of around 10-15%. On the other hand, if you have sufficient write-offs, it may not matter that much to you.

Borrowing up to 50% of the account value and $50,000 max is allowed on my 403(b): The 401(K) may be the same.

For me, borrowing from myself in 1998 turned out to be an exceptional way to enjoy our "retirement savings" long before retiring, get into home ownership, diversify investments, leverage, get a tax write-off, weather the stock market down-turn, etc, etc, etc.

The additional benefit is creating a lifestyle of having the ability to live where you want to live with a fixed mortgage (while the rates are still low) and having someone else pay the mortgage while they are enjoying it (when you want/need to live somewhere else).

I think it can be a good (tax-free) use of retirement savings to reach your retirement lifestyle goal(s).

It's nice to own property because you get to make the decisions on how to manage it.

Please keep me posted on what you decide to do. We all learn from each other's actions and how things turn out.

Good luck with whatever you decide!