Cashing out 401k for rental

Jason Young · 2021-02-28T09:33:21-08:00

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..? Thanks, Jason

Jon K.

Rental Property Investor · Perry Hall, MD · Member since 2016 · 588 posts · 600 votes

5y

@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.

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Jason Young

OP

Investor · Southeast, VA · Member since 2017 · 46 posts · 11 votes

5y

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 🤔

Cashing out 401k for rental

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