So I am recently starting a career as an analyst and I need to start making decisions as far as my 401K is concerned. I have this idea that I'm not sure is good/ bad or allowed with 401K's. I will explain my two options below. Keep in mind I would like to use this money to invest in real estate within 3-5 years, this would be a post-tax 401K (for option 1), and I want to avoid withdraw penalties.
My company matches 6% of my contributions to my 401K. I would match the 6%. At this same time I would be living frugally and saving money, let's say $5000 a year. I could deposit this $5000 into my 401K and earn a return until I'm ready to take it out. Then, after 3-5 years I withdraw my money + earnings and invest it into multi-family units.
I would still match the 6% but now I would just keep the $5000/ year in a savings account. I would also choose a pre-tax 401K so I will be taxed less every year. This way I have the money when I'm ready and there are no added fees.
My questions are: Is option 1 possible? Can I deposit and withdraw in my 401K at will without withdrawal fees?
Also, would it be smarter to do the post-tax 401K while I'm not making a large income or do a pre-tax 401K and have a smaller income to be taxed?
If this doesn't make sense or there is a better idea, please feel free to let me know.
Thanks for reading!
Option 1 - If you withdraw from 401k you will be charged taxes plus a penalty. I think it is around 10%. If you did a ROTH IRA you could withdraw basis with no penalty. But you would be putting your money in somewhere near the top of the market so would likely lose some of your principal for a time.
If you are in the 15% tax bracket or lower it makes sense to pay taxes now so you would do the ROTH 401k. IMO.
I think you should get the full match and leave that money alone. Then save what you can and build up cash to invest in real estate. I think Option 2 is the best move for you. Assuming a part of option 2 is that you leave that money alone.
@Jacob Sampson Okay thank you for your feedback and advice! If I did option 2, do you recommend I put that money into index funds so I get some kind of return or should I just leave it in the bank?
As @Jacob Sampson mentioned in his reply you would be taxed when you take a distribution (withdrawal) from any retirement plan that is tax-deferred. If you are under the age of 59 1/2 you will also incur the early distribution penalty. These tax sheltered retirement accounts are not built to be used as a normal bank checking or savings account. They are to save and compound over time to prepare you for retirement.
In regard to option 1 - Looks like you will spend a fair amount of money of fees, taxes and penalties. Does not seem like a great option for saving money.
In regard to option 2 - Significantly less fees and expenses with this way. Very low interest rates in a bank savings accounts
Post tax 401(k) - Most advisers will tell you that the best time to increase contributions to these accounts are when you are in a lower tax bracket. The general assumption is that when you reach retirement age, you will be in a higher tax bracket.
Option 3 - I am not sure if you have ever heard of a self-directed IRA or 401(K), but these types of accounts would allow you to save for retirement in a tax sheltered environment and let you invest in real estate using those fund at the same time.
A self-directed IRA (SDIRA) follows all the same rules and regulations as a normal IRA, but allows you to use your retirement account to invest in things like real estate, notes, mortgages and private lending. There are some rules regarding these types, but many investors like the control they get from hand picking their investments and doing their own due diligence.
@Carl Fischer Thank you for your feedback. I will definitely look into a self-directed IRA or 401(K). I just want to make the most use of my money while I'm young.
@Garrett F Anderson - If you are trying to accumulate capital to invest in RE then I would accumulate in a bank account. Don't put that money at risk.
If your goal is to access funds for investing outside of a tax-deferred vehicle in 3-5 years then it doesn't make sense to put them inside of such vehicle to begin with. 401k is designed to be used in your latter years.
You can use self-directed IRA as Carl suggested, but keep in mind that you would be building up your retirement nest egg that you won't have access to until later, which can be great addition to your overall wealth building plan.
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