401K Withdrawal or Financing?

Question

Looking to buy my 2nd AirBnB property for <$400K (singe family).  I am considering financing the $112K due at closing with a HELOC and a 401k loan and get a $300K investor loan.  This comes to a monthly outlay of $3,721 with a total loan costs of $284k.

I am 60 yrs old (no penalty withdrawal) and have no intention of ever retiring.  So given that, I am looking at my retirement funds (>$2M) as a possible source for funding.  At a 17% tax rate, my cost for the $482k withdrawal (includes tax payment) comes to $82k in taxes.

Since $82k in taxes is less than $284k in loan costs, I think this is a viable option.  What am I not considering?

Anthony Wick · Answer

How are you figuring out your 17% tax rate? Just like income, a 401k withdrawal is taxed at a progressive tax rate on your income for that year. You mention you're still working, so that income is also taxed. Your actual tax rate will be much higher than 17%. 22, 24, 32, and up to 35% on the top end of that withdrawal. I would absolutely look at financing rather than pull half a million taxable dollars out of my 401k. Perhaps you can work with your CPA on deciding what the best withdrawal tax advantage would be over the course of a number of years. You could possibly get a tax advantage by slowly doing a Roth IRA conversion from your 401k, prior to reaching age 70 1/2 when there are Required Minimum Distributions.

Taylor L. · Answer

I see you're up in NOVA - Hi! Is this property you're considering located in Richmond? If so, just be aware that the city is trying their hardest to essentially destroy the AirBnb business in our fair RVA.

What is the price of this property? $400k? Why would you need to withdraw $400k from your 401(k)?

J. Mitchell Bernier · Answer

@Michele Masters I think what Michael was getting at was, hypothetically, if total rents was 1000 and you finance it with a loan costs of 600 a month, you get 400 cash flow and the tenant is paying the 600 for you. While if you pay all cash, ie 401k, that whole amount is going to you, so are you going to used that extra 600 to build up your accounts again if you don’t finance it? I would personally talk to a CPA before to figure out the best way to liquidate the 401k with paying the least taxes possible.

Michele Masters · Answer

@Anthony Wick I probably figured out the tax rate naively -- I looked at my Federal Return and divided my Total Tax (line 15) by Taxable Income (line 10).

Michele Masters · Answer

@Michael Lewis Lee  The cash flow from the property will not be paying off any 'debt' if I use the funds that already exist in my 401k, so I don't understand your point.  I have not yet purchased the property.

Michele Masters · Answer

@Taylor L. The property is in the Outer Banks and there is no concern with changing regulations.

The price of the property is $400K.  As I stated in the post (which got mutilated after being posted) the overall cost to use 401k funds is less than loan funds.  That is why.

Michael Lewis Lee · Answer

Hello Michele!  I'm 62 and have been in the construction management business and a Texas real estate broker for about 30 years.  even though I don't know everything but I think your leaving out the taxes due on a withdrawal on your 401K versus a loan (which is typically zero).  I'd rater be in financing debt than 401K debt.  One is a debt and the other is a liability.  Your Tenants are paying your financing debt but may not be paying your 401K debt.  If they are  paying for that too, then it is probably a good deal.  How much are you paying on the property loan?  You might need to shop around to get a better deal on the property financing.  You might be including the down payment but at least it is giving you automatic entity with it.  I would rather have entity over a liability.  Good luck to you!

401K Withdrawal or Financing?

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