What to do with my 401K?

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

8y

This is probably bad advice, but how badly do you want to get started in real estate? I personally think the 401k or IRA or any other deferred tax vehicle stamped as a path toward a comfortable retirement to be highly overrated. The deferment is great and so is the employee matching, but unless you contribute at or near the max for most of your life, you aren't going to get rich from it...and you'll only get that benefit when you are really old. No thanks.!!

I've EMPTIED my 401k twice in the past 8 years and used those funds to buy real estate. I paid a huge penalty both times, but I can trace a nice chunk of my current holdings back to these moves. Of course it helps that I'm in a part of the country where RE appreciates quickly.

When I listen to my Co workers talk about their strategies for their 401k, all I can think of is "how the hell are you going to retire with that??" No thanks! I intend to be financially independent in 3 to 5 years..... which needless to say my 401k will have absolutely contribution in this regard.

I'm not saying you should definitely empty your 401k and use it seed your RE career. This is a very costly and risky move....which brings me back to my original question of how badly do you want it? All I'm saying is that I did it twice and both times it has paid off handsomely and I'm very glad I did it both times. My 401k balance is pathetic, but I couldn't give a rat's ***. I still contribute 5% because my employer matches 100%, but once it reaches a certain amount, I'll probably empty it again.

Mark Welp

Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes

8y

Bernard Reisz Your comment about life insurance is incorrect. Having a properly structured whole life policy is the best tool to have with REI. You take a tax free policy loan for down payments, not a withdrawal. PM me if you want to discuss.

Robert Reineri

Flipper/Rehabber · Cookeville, TN · Member since 2018 · 41 posts · 13 votes

8y

You should make every effort to MAX OUT your 401k. I'm talking over and above the match. It comes right off the top line and you pay no taxes on that money now.

I did this for the last 15 years, but wish I'd started even sooner. As it is, I'm still "retired" at 58 (meaning i only work because i choose to) and have plenty of cash money for RE investment inside my solo 401k.

When you're 60, you'll thank yourself.

Aaron Hunt

All Over, USA · Member since 2017 · 689 posts · 756 votes

8y

Originally posted by @Tony Kim:

This is probably bad advice, but how badly do you want to get started in real estate? I personally think the 401k or IRA or any other deferred tax vehicle stamped as a path toward a comfortable retirement to be highly overrated. The deferment is great and so is the employee matching, but unless you contribute at or near the max for most of your life, you aren't going to get rich from it...and you'll only get that benefit when you are really old. No thanks.!!

I've EMPTIED my 401k twice in the past 8 years and used those funds to buy real estate. I paid a huge penalty both times, but I can trace a nice chunk of my current holdings back to these moves. Of course it helps that I'm in a part of the country where RE appreciates quickly.

When I listen to my Co workers talk about their strategies for their 401k, all I can think of is "how the hell are you going to retire with that??" No thanks! I intend to be financially independent in 3 to 5 years..... which needless to say my 401k will have absolutely contribution in this regard.

I'm not saying you should definitely empty your 401k and use it seed your RE career. This is a very costly and risky move....which brings me back to my original question of how badly do you want it? All I'm saying is that I did it twice and both times it has paid off handsomely and I'm very glad I did it both times. My 401k balance is pathetic, but I couldn't give a rat's ***. I still contribute 5% because my employer matches 100%, but once it reaches a certain amount, I'll probably empty it again.

I think there is an obvious exception to this, and that is strictly with the new 2018 tax brackets and specifically with those who would jump from the 24% bracket to the 32% tax bracket.

Maxing out the 401k can save in taxes, and it becomes otherwise free money.

It’s an additional 8% (of what someone makes on top of the 24% bracket limit) that one would be giving away every year to the government until 2025.

It’s not easy to make 8% year, esp when the market turns and chances are pretty good that between 2019-2025, there will be a US economy crapout.

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

8y

@Mark Welp

I wrote that cash-value life insurance is a hotly-debated topic...so here goes!

Please provide the following info about a life insurance policy that you consider "properly structured."

% of premium paid that is available at policy inception as "leveragable" cash value. This refers to Day 1, not the end of the policy year. i.e., what portion of the money paid to the life insurance company is immediately available as cash value.
% of cumulative premium paid at 1st policy anniversary that is available as cash value (beginning of policy year 2, at which point 2 premium payments have been made; not as of the end of policy year 2, which is a year after the 2nd payment was made and 1 day before the 3rd premium payment will be made).
Ditto for Policy Anniversaries 2, 3, 4, 5, 6...until cash value at policy anniversary (premium payment date) exceeds cumulative premiums paid at policy anniversary
% LTV against which lender will lend against cash value (i.e., on 90% LTV means that if at policy anniversary there is $100,000 of CV, $90,000 could be borrowed)
Interest % paid to lender
Cash value "dividend rate"
Type of policy being used: Whole Life, Universal Life, Indexed Universal Life, etc.

I'm not opposed to CV life insurance, but rather strongly in favor of it - when appropriate.

[email protected]

Thomas RutkowskiPro Member

Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes

8y

Originally posted by @Mark Welp:

Bernard Reisz

Your comment about life insurance is incorrect.

Having a properly structured whole life policy is the best tool to have with REI.

You take a tax free policy loan for down payments, not a withdrawal.

PM me if you want to discuss.

I would rephrase this statement.

Any properly designed Permanent Life Insurance policy is the best tool to have with REI. I don't drink the infinite banking kool-aid. These strategies work with any permanent life insurance.

The guarantees of a whole life are over-rated. Insurance companies don't ever intend to actually pay that rate.

If you were an insurance company, how would you design a permanent insurance product? I would want to make sure that the premiums were enough for the insured to save up their own death benefit over the course of their lifetime. And I would assume a worst-case interest assumption. THAT is all the guarantee represents.

Whether it is a whole life, a universal life, or an Indexed UL, every insurance company invests their cash in the same exact types of investments: bonds, treasuries, mortgages, etc. Within reasonable limits, they are all going to have the same returns. The only difference with an IUL is that the returns are used to purchase as much movement in market indices as possible using options. But their actual cash and reserves are invested in the same things.

The faster the insured saves up their own death benefit, the faster the risk is eliminated for the insurance company.

Over time, the IUL is more likely to outperform whole life because the growth is linked to the equity markets rather than the debt markets.

Franklin Romine

Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes

8y

When I had a day job I borrowed from my 401K to purchase a property. I had people laughing at me for doing it, saying how foolish that was at the time.

That property and many others got me out of that day job.

3 Reply

Scot Howat

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

8y

@Derek Tellier

I'm not saying you should withdraw, just that real estate could be more lucrative. You could take a 401k loan (not withdrawal) and use that towards the purchase of real estate. Then you've got both!

Justin WindhamPro Member

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

8y

@Lane Kawaoka

I'd rather have real assets with higher returns AND the tax benefits of a retirement account. This is in addition to investing in real assets with the highest likely return with non-retirement dollars as well.

OP

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

8y

Most for the life insurance conversations went over my head. I’ll have to research i.e. talk to an expert.

@Scot Howat I agree and didn’t take it that way. My only purpose of this conversation was to find out options I had. I’m still unsure of the loan options I have with my plan. Waiting on the admin to get back to me on it.

OP

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

8y

Originally posted by @Justin Windham:

@Lane Kawaoka

I'd rather have real assets with higher returns AND the tax benefits of a retirement account. This is in addition to investing in real assets with the highest likely return with non-retirement dollars as well.

That is definitely the ideal plan Justin Windham

Ryan Fuchs

New to Real Estate · Frisco, TX · Member since 2018 · 13 posts · 5 votes

8y

Coming at it from a financial planning perspective, you’re in a Safe Harbor 401k. Putting in 5% and getting an immediate, 100% vested match of 4% is an immediate 80% return on your money. Few, if any, other investments will give you a return close to that unless they are very risky or very illegal (and even then, the return is likely not immediate). Also, your employer accounts for a match when they set your salary, so they would love not to have to match anything because it’s saving them money. A 401k loan might be an option if your plan allows it (not all do), but there are negatives to that and generally falls into the “just because you can, doesn’t necessarily mean you should” category. So my advice, as others have stated, would be to keep the 401k where it is and keep putting in your 5% to get the full match. Then use excess funds to start saving up for the REI if that is the route you want to go. Best of luck.

John FortesPro Member

Multi-Family Syndicator · Abington, MA · Member since 2017 · 603 posts · 347 votes

8y

Always take the free money if they are giving it.

Account Closed

Member since 2018 · 70 posts · 89 votes

8y

I agree with most that you should keep doing what you're doing in regards to contributions. Check out the 401k loan option and also see the rules around multiple loans (some allow you to get multiple loans so long as you don't exceed the total allowed amount). One tactic might be to pull a little out in a lone (enough for the down payment you need) and know that you have reserves if your company will allow a 2nd 401k loan because you could then get a 2nd loan if your finances got too tight.

Obviously you must be good with all of the 401k loan caveates regarding risk & expense whether you leave your company expectedly or not.

Kishore P.

Realtor · Farmington, MI · Member since 2016 · 126 posts · 69 votes

8y

@Derek Terek:

Find/Research How? your could:

(1) generate additional earned income as self employed person/business

(2) open Solo 401K/SDIRA from earned income in Step 1

(3) When you leave your current company as Employee

(4) you may roll over your existing 401 K into this newly created Solo 401K/SDIRA.

Good Luck

Cameron Sylvester

Real Estate Agent · Saint Petersburg · Member since 2017 · 11 posts · 5 votes

8y

@Derek Tellier Hi Derek, First, I would never give up free money so keep putting 5% in. (You are in your prime "saving" years so contribution is key. Second I would create a second fund for investing and start there. Maybe do some assignments or wholesales to get some cash then look for some cash flow long-term properties (Just an idea). Best of luck keep us posted.

Nate Sanow

Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes

8y

@Derek Tellier I’ve enjoyed this thread a lot. Thanks for posting it. I was thinking, is a large sum of cash vital to REI? Maybe... maybe not? The infamous BRRRR strategy by legendary no & low money down Brandon Jedi Master Turner teaches all us padawon pupils that in theory & on basic principle, the down payments needed for portfolio growth can actually be created through hard money loans, value add opportunities, and refinancing into long term service loans. I’m making a personal goal to BRRRR more next year. Creating a financial runway to yes have some savings / high equity stakes & even a possible HELOC for plan B or C or Z in case if all hits the fan. But I know I’m just super guilty of analysis paralysis more than I care to admit. So i friendly dare you as I dare myself to not ask “if you can” but “how will you” grow a portfolio (or flip or wholesale en masse if that is your goal) That said, I actually followed this thread a lot as I just recently was able to get a 401 and chose to do so largely because I’d like to one day use it for REI if I maybe am able to roll into a self directed IRA. That perks my interest; and I’ve met some legends on a compatible trajectory whom have inspired me towards that. At any rate, best wishes to you. Buying is the best teacher, do that and the answers seem to follow. I think.

Steve B.

Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes

8y

@Derek Tellier so doing simple math you make 80k per year and from your picture you have a duel income household ina cheap area of the country? I am guessing your spending habits are keeping you from getting into investing success and REI, not sure how liquidating a 401k and paying the penalties is a goong to be a benefit .

OP

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

8y

@Steve B. Actually really just a single income household, cost of living is not bad at all here.
Yes previous spending or non saving habits have hindered me to this point. But that is in the process of changing quickly and dramatically.

I really had no intentions to liquidate my 401K, my original post was simply to get an opinion on if continuing to contribute vs putting that $ (what little it is) weekly into somewhere I would have access to.
The thread took off like a rocket down several paths that it wasn't intended at all and if nothing else has created a lot of concepts surrounding 401K's in general.
It led to me getting curious about what WAS possible but really never intended to get use my 401K. Just nice to know if there are options at some point.

Alan Grobmeier

Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes

8y

@Derek Tellier, you have another option that I dont think anyone has hit on:

MAX it out! All the way, until retirement. If you can afford it.

Here's why: Eventually you will no longer be working where you are working. You can then take that money and move it to a self directed IRA w checkbook control LLC. You can then buy a property (or 2) and have 'drip' income throughout your retirement years vs. cashing out now and paying the penalties.

I was laid off from Cisco Systems in 2013. I've been able to almost double the value of my '401k' while running it myself.

Julie N.

Real Estate Investor · Unionville, CT · Member since 2016 · 260 posts · 167 votes

8y

Take a loan from your 401k to use as a down payment. You will pay yourself back the loan plus interest. Usually over 5 years. It’s not considered a withdrawal so no penalties unless you don’t pay it back. Use your investment to leverage other investments. 😉

Scot Howat

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

8y

Ok cool.

OP

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

8y

Quick update for anyone following my specific scenario.

No loan option on my plan. So only way to get anything out while I’m employed with them is IRS hardships.

Let me verify that I’m not actually looking to get $ out I’m just sharing what I learned.

Hardship withdrawals are for very specific reasons only. They come with a 10% penalty, taxes of course and then can’t contribute into your plan for 6 months.

So have to be pretty desperate, like in foreclosure, to actually even consider that.

For myself once I get my REI business started which might be once I've got my license and start working for a broker part time, I'll look into starting a solo 401k or SDIRA or something to start contributing to so when I leave the job I have something to roll it into.

Ramesh Nyberg

Investor · Miami, FL · Member since 2018 · 47 posts · 21 votes

8y

Do any of you experienced (and 61-year old opinionated) investors know of a lender that will do non-recourse loans, so that we can purchase fix/flips with our self-directed IRA?
Thanks for any help you can provide

Ramesh Nyberg