Hey BP fam,
Hoping to reach some savvy investors with this question. So I decided to close my old 401k from a previous company. I was going to move it into an IRA.
When I talked with my IRA rep he says I shouldn't have gotten the checks sent to me directly but instead sent to them so it rolls over and I don't get hit for taxes.
Well it was too late and the checks came anyways, which they say I can just shred them and do the rollover correctly and not take the tax hit.
This got me thinking though. I see on the checks how hard I would get hit by the taxes (not too bad).. some were Roth and some traditional so I did already pay into the Roth taxes. The net amount leaves me enough to be able to buy some property in cash, albeit.. something modest but still property that I could rent out and have it start paying me back now and into retirement.
Other than the tax hit, am I missing something? Am I the only one that thinks this is a good idea? I’m 42 so retirement is still a ways off.. I wouldn’t be able to see that money until then anyways. If i use that money now.. that same money could be paying me back now and into retirement, all while hopefully gaining in property value.
The only other problem is this is the bulk of my retirement. I have other 401k’s with my new company, but nothing close to this amount. But I’m not so sure I trust this money in the stock market anyways. It took me 20 years to accumulate that and if I use past performance to guess at the future value... it doesn’t look good. Those mutual funds are a crapshoot anyways.
I know this is a little off topic but I do want to get another rental and I’m not really interested in going the SDIRA route. I’m just thinking this could easily make me $1k/month now and for years to come and into retirement. Hell by then it would probably make me $2k a month after all expenses. Just figuring $1k/month net over the next 20 years is $240k. Why get paid back in retirement later when it could start paying me now... and then..?
@Jason Young This is a great post and I've had similar thoughts myself. It's good to constantly examine out of the box things like this. I didn't see you mention the early withdrawal penalty, which I believe is an additional 10% on top of the taxes for your 401k.
What is your actual goal with your investing? If you're considering using this money for something other than "safely" retiring at the age of 59.5, I would think you'd want to maximize your ROI. Will you come out ahead withdrawing the money and buying a property using all cash? Would it be better to withdraw it, use leverage and get 3 or 4 properties with that same money? Why not go the SDIRA route, use leverage and get 6 to 8 properties with the money you wouldn't lose in taxes + penalties? You could withdraw the cash flow and pay the penalty + taxes on that on a monthly basis as well. Or let the cash flow accumulate in the SDIRA and continue to buy more properties in it.
I don't have a good answer for you, just trying to ask questions to encourage your line of thinking.
Thanks, I guess my goal is just to have that steady stream of income now and into retirement. It just seems like with the 401k/IRA it's only going to pay me back later, not now. By the time I retire this could pay me $240k easily over the next 20 years and then when I retire it just keeps paying me.. and I still have an asset that should've appreciated nicely over 20-30 years.
Maybe there is more taxes I’ll see later like early withdrawal. I’m really not sure but I’m thinking even with all the tax hits it could be worth it.
I’m not really sure how the leverage works to get more properties. With my current mortgage and expenses I don’t think I could get approved for much more. I already have another rental as well that I bought with cash a few years ago and it pays me that nice steady monthly stream that I could essentially double with this potential next property. However I am looking at ways to scale up from my first rental. My liquid cash is running low so figured using this 401k money might not be a bad idea.
It seems either way I’ll be paying the taxes now or later, it would only be slightly less taxes later if I get hit for the 10% early withdrawal now. Essentially, it’s like I’m only losing 10% but I get all my money to start paying me back now.
I didn’t want to go the SDIRA route because again that doesn’t start paying me back until later in life. It almost seems like a no brainer... start getting paid back now AND in retirement or just.. later in retirement.. hell I could be dead by then lol
Like you were saying basically... will the rental pay me back more from now until I die or will the 401k pay me back more from retirement till death?? I guess it’s all a gamble really. I could make up the tax hits in less than 3 years probably. Hmmmm
Like I said though I do have another 401k.. it’s just so new that it doesn’t have much in it. But if I keep that going from now until retirement that should work out pretty good too hopefully, since I can’t retire until at least 20 years from now. I would like to find ways to retire early though ;-)
Thanks for helping me think 🤔
@Jason Young awesome post/question... I’m a fan of diversification. I love real estate, I love the stock market. I made a personal rule for myself that if I use/move money in the market to invest in real estate it has to come from my personal brokerage account never my retirement accounts. That’s just a personal rule I have to keep me grounded and focused but I know others may disagree. Best of luck!
You can withdrawal Roth IRA contributions at any time with no tax or penalty.
If you purchase an unleveraged rental property, your pretax returns may be similar to investing in mutual funds over the long-term (high single digits). Painting broad strokes.
There are lots of ways to withdrawal funds from retirement accounts prior to retirement (Roth contributions any time, 72t distributions, Roth conversion ladder during early retirement, or simply pay the 10% penalty).
Any advice beyond this point would require knowledge on the size and composition of your your traditional 401k and your personal tax situation. With your fact pattern (purchase one unlevered property), I would look into converting the traditional 401k to a Roth (depending on the size of the 401k and your tax situation in that year) and investing the combined Roth in the rental property. You get your rental property, can withdrawal contributions and conversions at any point tax and penalty free, and your profits accrue tax free (which is a huge benefit over time). But, there's not enough information on the post to know.
I totally get the desire to own a mortgage free property, but if you are in growth phase right now into retirement, you could do much better with leveraged double digit returns on multiple properties. Keep in mind that with the same available capital, you may be able to essentially pay no taxes on the rental income over the next two decades, enjoy the appreciation of multiple properties at the same time, all while the tenants pay down those mortgage balances for you.
While the debt paydown and appreciation build your equity positions in these properties, you can then look to put that equity to work for you via HELOCs or cash out refi’s.
Equity locked up in a property has zero return.
It’s nice to have options though, right?
Thanks. I guess maybe I’m missing the point. You say equity locked up in a property has zero return. Wouldn’t the monthly income produced from owning itin full be my return? I’m having a hard time visualizing all the debt I would take on with Helocs, etc. This is also why I’m probably having trouble scaling up from my first rental property because I paid for it in full and now have no capital. I could sell it and make good money but I’m enjoying the passive income. I’m not even sure I could get a heloc or cash out refi because with my mortgage and other expenses I’m pretty maxed out... I don’t have any debt but my main home, but I don’t think I can be approved to borrow much more.
I asked a very similar question a few months ago on here. The overwhelming consensus was to keep the money in the market, mostly because it would have the tax deferred growth and I would avoid the prepayment penalty.
Could you put your money back into the 401k and then just take a loan against it? You’ll have the access to capital but won’t have to pay the prepayment penalty. Plus you’ll be paying yourself interest on it.
Yes it’s tax deferred but I’ll still pay taxes on it either way right? Perhaps more later because it will be worth more. I guess what you’re saying is I’ll pay taxes on the income from it by renting it over 20 years? I can see that argument for sure. I think I probably could take a loan from it it, but I hate borrowing money from anything unless I really need to but it is nice to be able to tap into it if needed.
Most people would say keep the money in the market.
To me, though, it's a numbers game. I worked out the math and it turned out that the ROI from owning rentals is infinitely larger than keeping the money in the market, even when I considered the taxes and penalties of cashing out.
I think it's a personal preference thing.
I should add that I'm in my 30s so it's not the end of the world for me to take cash out my 401k.
I'm in the exact same position as you. Although I'm just getting started myself with my first deal which I plan on buying with all cash, using my Roth IRA, stocks and a 457 (no 10% penalty just taxes).
I will still have another 401k, leftover funds in 457 and a pension that I am Collecting now. I’m 47 and I work part time now. Personally, I feel this is a good strategy and will add diversity to any portfolio while adding passive income monthly like you mentioned, all while building equity over time with no mortgage!
I’m going for it and I wish you the best of luck as well
I think I’m going for it too. My wife likes the idea. I just went to look at the condo. It’s going on the auction block Wednesday. Hopefully I can get it at the right price and hopefully this doesn’t end up being a bad decision. Any other feedback is greatly appreciated and thanks everyone for your help.
1. Get the checks resent to be deposited in a new Roth IRA and the Traditional rolled over into your current 401k or new IRA.
2. Research investing in real estate with leverage. Research it until you see how very benefitial it is compared to digging a hole in the ground, dumping your money in and going out to it every month to take some of it out.
3. "It took me 20 years to accumulate that and if I use past performance to guess at the future value... it doesn't look good." How the last 20 years could look anything but stellar I haven't a clue. Invest your IRA's and 401k's in the SP 500, Small Cap or VTSAX... you should be nowhere near bonds. Remember, our retirement accounts charts should look like a hockey stick, not a straight 45 degree angle... that money doubles itself every 5-8 years... doesn't mean much when you have $10,000 in, but when you have hundred of thousand in it starts taking off. Consistent contributions + modest returns +TIME = $$$.
4. Now that you appreciate leverage, educated yourself on property management as best a novice can and saved up a bit of a cushion- go ahead and take a loan from your 401k to purchase a property. Who knows, maybe the market won't be as sky high as it is now!
@Jason Young like some others have said use leverage. If you want to be financially free before "retirement Age" than pulling it out is a good move. I reached financial independence with Real estate STR's mostly in particular in my early 20's. After a couple mini 6-8 month retirements for the births of each of my sons my wife and I now have a STR's property management company that help people reach financially independent with real estate that has amazing cashflow and appreciation.
@Jason Young at your age I would suggest to carry a mortgage, even on a couple of properties. The bigger question is will your debt to income ratio give you the opportunity to get these low mortgage rates. If you can put 30-50% down on rentals as is I would go that route. As long as you are under 5% mortgage you will make out in the long term. Just be sure you have an emergency fund and stash a goodly sum of your cash flow to take care of issues. Get as many investment properties that you can support at your age. When you are 70 you will live a great life. Awesome tract you on on.
@Jason Young You could buy Rental properties inside of your IRA. Look up for CPAs here on the forums who could advice you appropriately. I started 401K with one sole purpose, not throw away that money in taxes, so I am always against the idea of taking a penalty hit. You can also look up some youtube videos about purchasing a property in an IRA. You have 30 days to complete your Rollover, so if you plan to go Rolling into another IRA, better hurry :)
Wish you the best and good luck with REI!!
Thanks everyone, I’m not sure what I’m going to do. My wife tends to think I can’t really leverage anything, like Fred said I think my debt to income won’t work out but maybe I could look into it and see how much I would have to put down.
I kind of like what this guy is saying...
@Cody Benedetto This is also my rule. I have enough faith in the compound interest that mutual funds offer to commit to a 401k as a piece of my retirement plan. I don’t usually understand it when I hear individuals say they “don’t trust” the stock market. What is it that you don’t trust exactly? And at retirement you shouldn’t really be exposed to stocks much at all anyway in your 401k.
Real estate is a pivotal part of my long term retirement plan and is something I’m committed to. But cashing out a retirement account feels like robbing Peter to pay Paul. And if COVID has taught us anything it’s that the rental market can also have its insanely turbulent times too.
@Jason Young I’m done with 401ks— a decision I just made after reading three books on Tax-free retirement strategies. Instead, I plan to invest the same amount into permanent Life Insurance policies (high premium low death benefit). My goal is to have these grow over the next few years to create my own private banking ecosystem I can borrow from to fund my real estate and bypass the commercial banks. There are tons of benefits on how this approach beats Tax-deferred plans that you can read up on, including accessing this money anytime without penalties and taxes. Not sure how I missed this strategy until just recently but I’m kicking myself I didn’t make this switch earlier. Patrick Kelly’s “Tax-free Retirement” is the best book of the three I read. Good luck!
Why are you not interested in SDIRA? Curious because I’m starting to look into SDIRA instead of investing so much into 401(k).
Jason, here's the old guy perspective.
lots of good advice on here, I'm 62 closer to retirement age, I went the SDIRA route with my accounts, Buying and holding properties in the IRA , building tax deferred income and purchasing houses inside IRA about every Two years. mine are traditional Ira's , Agreed i don't get to hold the money in my hands but it fully remains dedicated to real estate and keeps me on focus. great rate of return.
As far as a Mortgage loans I now as of last month have none. So that is a option I have available right now.
Refi, heloc, etc. some would say I am not using it to the full potential, At my age I am thinking , Whew and Am building that cash reserves, everyone is talking about. I need direction on what to do with that liquid cash.
My third Strategy has been to buy portfolio lending properties in an LLC , we have been doing this for years,
with the W2 income loans have been available. This is the biggest part of the portfolio , the properties have started paying off. This is the NO money down option, OPM!!! And it doesn't effect my debt to income ratio's.
As far as the Stock Market, when you wake up one morning and 50 to 60% of your life savings is gone. It wakes you up, At least with Real estate I feel like I control my destiny. market might crash but i still own the properties. and were still making people who need to rent. As long as i am not over leveraged i should be ok.
I have started taking a small dividend from my IRA, It covers The additional payment of a structure I built on my property. I tell everyone after taxes, I get a building pmt, and a happy meal each month . If I really go all out I supersize it. lol
I still have a W2 J.O.B. . It provides me with insurance. (when your old you need it) A nice income and money to invest in my future.
The answer is there are so many different options available YOU control your destiny.
Good luck to you
Thanks all, Yeah I honestly don’t have much confidence in the stock market. As long as I’ve had this 401k it really hasn’t even done that well IMO and I feel like it was pretty well balanced from when I was younger until now. My picks were more on the riskier side but I feel I should have a lot more in my account... maybe double. @Scott Winter I’m thinking of not going the SDIRA route because of the hassle of it all. The risk of doing something wrong and not following those rules completely. Yes it’s an unconventional way to have more options with retirement but my thing is everyone is caught up in the tax deferment/tax penalties, but you’re going to get hit with taxes either way..yes I’ll get hit with the early withdrawal but then the money is mine. I can do whatever I want with it. If I were to blow it on a sports car then that would be a terrible waste. However, if I invest it wisely then I can start having that money make a return to my pocket now... AND in retirement. It’s like why wait until then to start paying me back? I could be dead by then anyways. I see everyone’s argument and they are good, so it is a hard decision. Either way it’s all a risk. There’s no guarantees in anything or the stock market. I gotta run for now, but this is making us all think 🤔 😝
@Michael A. Thank you!
@Jason Young I would highly recommend reading The simple path to wealth by JL Collins. It is a light read, but very informative from a man who has had his hand in a number of "investment pies" throughout life. When you call mutual funds crap shoots it makes me feel like you are invested in exotic mixes... KISS, put your money in an SP 500 index.... no crap shoot. "if [you] use past performance to guess at the future value..." your money could double itself 3 times by the time you retire: 300k, 600k, 1.2 million... and that doesn't even account for future contributions!
Also, I would be concerned with just starting a new job and taking on the responsibility of being a landlord... it is far from passive income.
Short answer for you below after being in the securities industry:
1) never cash out prior to retirement age, you’ll get hit with 10% plus taxes
2) try to roll over to IRA or your other 401k. If they sent you checks, you might have 60 days or so to roll over
3) try to structure if in ira, to buy real estate directly, I’ve never done this and sounds too complex. If you’re in an ira you might be able to invest in reits for RE exposure.
Please check with your tax and financial advisor for final opinion. Hope my initial thoughts are helpful