Should I take out my 401k?

Question

With the CARES act I can take out my 401k with no penalty. I have two rentals already woth &100k equity. My wife and I are teachers and currently remt rather than own a primary. I have $100k in my 401k . Should I just take it out and add to our portfolio of property or perhaps buy a primary?

Mary White · Answer

Why on earth would you withdraw from an account with such a healthy balance?  The stock market will recover and the compounding interest on that $100,000 will pay off significantly for you. You'd be selling investments low to buy in high in real estate. Please rethink this. It simply doesn't make any logical sense. Also, investment accounts can help you qualify as loans as a percentage can be used to show reserves for bankers. Best of luck! I hope this helps in some way.

Chris Levarek · Answer

@Will Gile In the end, audits and legalities aside, it comes down to if the yield or return on your 401k will benefit more from an investment otherwise. If you will be using the funds to cover expenses due to hardship, then most surely it makes better sense to leave it in the retirement account unless absolutely necessary as there isn't a true return in a investment sense.

However, if you are using say the 401k loan to invest into real estate and achieving all the IDEAL (income, depreciation, equity, appreciation, loan pay-down) benefits while paying an interest rate back to your 401k, I do not see how the stock market returns could even come close to matching this.

In my opinion and data indicates, we were highly over-inflated with companies buying their own stocks to inflate values. Meaning, we were living in a false high so the current values are the more reasonable high or norm. With oil going negative and false positives from stimulus payouts, I expect we have not hit the bottom in any case.

For each person, it is a judgement call however. Weigh your options and hopefully try to limit emotional decisions.

Will Gile · Answer

@Chris Seveney my wife is a sub, she can’t sub anymore. That’s all I said to my retirement company and they said I qualified.

Chris Levarek · Answer

@Will Gile Diversification is always very important with investing. One can and should diversify as it limits risk. With that being said, whether one chooses to diversify in stocks and real estate in general, the choice is theirs. I will say however, that diversification can occur at the real estate level as well. Some ways to diversify in real estate of course can be by location, asset-type, methodology (syndication, joint-venture, sole-ownership), etc.

Example :  If an investor invests into a syndication fund that invests into self-storage, mobile home parks and multifamily. This investor has just split the risk of any one single asset-type causing a massive game-changing loss. Now imagine if that same fund or investment was split into locations such as Columbus OH, Raleigh NC and Phoenix AZ. Each of those markets is reacting and will react differently to a recession or downturn.I would also argue that @Brandon Turner is diversifying across asset-types and locations. By house-hacking and flipping in Hawaii but purchasing/syndicating Mobile Home Parks across the U.S., he is achieving diversification.Regarding the 401k, the real thing to be aware of is, the loss has occurred to the retirement plan regardless of the next move to be made. If the loss has already happened, this simplifies the choice to be made as the most viable or rewarding investment strategy can be selected.

Chris Seveney · Answer

Yes While you may qualify to take it out, it doesn’t mean that you can use it for whatever you want.

Call them back and say you want to take it out and buy real estate with it.

Then ask them to put in writing that is allowed without penalty...

That’s like calling a bank and saying “can I wear a mask in the bank” - the bank says “why yes”.

well if you were wearing the mask to rob the bank, that doesn’t mean because they said you could wear a mask you could rob the bank...

they said yes because your intentions were to cover your income.

Now what are odds you could get audited - probably low but still a risk.

Tom Makinen · Answer

You might not get the 10 or 20% early distribution penalty, but remember two things

1.  You have to pay taxes on the 100K you take out.

2.  You have to return the money within 3 years.

If you are desperate, you might try the 401K loan, they extended the terms on it.  I am not sure if using all to buy real estate is a good idea.  I wouldn't even use it to buy a NNN lease

Pamela Sandberg · Answer

I would put in a plug for buying a primary residence (especially in California). Instead of paying rent, you could be buying equity into an asset that is likely to see good appreciation (depending on where you are in California). Also, after two years, most or all of the equity will probably be tax deductible.

Joe M. · Answer

@Will Gile as others have said, diversification is important and you will be most likely selling low after your account has been buying high over the last few years.

There are still lots of ways to acquire capital to purchase more homes. Think through those options that are still available.

George Blower · Answer

@Will Gile

Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways.

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Will Gile · Answer

@Chris Levarek i know Brandon Turner believes in putting everything in one asset class.

Should I take out my 401k?

Most Popular Reply