New York, NY · Member since 2015 · 21 posts · 8 votes
Hi everyone. I have some money in my 401K from my old job that I would love to use to start my real estate journey.
I wanted to know what is the best way to use this.
What I've been reading different avenues, as in self directed IRA, cashing it out. Moving it to my new job and taking a loan out on it.
With the self directed IRA, it didn't make sense for me since the profit goes back in etc. Don't want to cash out and lose almost half the money. I'm thinking just taking a loan on it
I wanted to know if anyone has any advice or am I on the right track with this. Thank you
Bj, you can start your real estate investing journey using your old 401k.
Retirement accounts are designed to provide you with the future benefits so if you are looking for present benefits qualified plans are not the source of funds to use. As you know you can still convert your 401k into self-directed IRA and gain the control over how those funds are invested but again it would be for your future benefits.
I agree with you that taking early distribution and losing half of your balance in taxes and penalties would be unwise.
Generally you can only take a loan from an active 401k plan. As such, you would need to roll the old plan into your new employers plan.
While that loan allows you to in a certain sense "use" the funds, you are limiting the growth of those tax-sheltered funds to whatever the relatively low interest on the plan will be, and that represents an opportunity cost. The more you can grow money inside of a tax-sheltered vehicle, the greater the impact of compounding the returns.
If you can afford to achieve your personal "now" investing goals without touching that money, you will be much better off in the long run. Similarly, if you can keep that money in a tax-sheltered plan like a Self-Directed IRA and put it to work in an asset class such as notes or real estate where you can generate solid, consistent, above average returns then you are really setting yourself up for the long term.
I figured taking out the loan and using it for the investment and then repaying the loan from the possible profit would kind of get the ball rolling.
I definitely understand the need for Self directed IRA and I feel that would make more sense if I had other ways to start the investment without reaching into the 401K
Bj, you can start your real estate investing journey using your old 401k.
Retirement accounts are designed to provide you with the future benefits so if you are looking for present benefits qualified plans are not the source of funds to use. As you know you can still convert your 401k into self-directed IRA and gain the control over how those funds are invested but again it would be for your future benefits.
I agree with you that taking early distribution and losing half of your balance in taxes and penalties would be unwise.
@Bj Ayoleke I am not a financial advisor, so listen to others on the specifics, but there are some really great opportunities to Joint Venture with members on here that have already established track records and great investment opportunities available. It's definitely something to think about once you get your hands on your hard earned money.
@Bj Ayoleke I can't provide advice for your situation, but I turned mine into a SDIRA and use it to invest in syndicated apartment communities. There are so many things you can do. For me it made sense to start with a RE asset class (apartments) and work from there.
@Bj Ayoleke, unless you have a few hundred thousand dollars in your account it probably makes the most sense to roll over funds into the 401k at your new job and then borrow against from the 401k for a down payment on a property.
One great thing about borrowing up to $50,000 from your 401k is that the transaction does not show up as a loan on your credit report. That can be a really useful element to consider.
The IRS says you can borrow the lower of: up to $50,000 or half of your account balance.
I agree that the loan option is probably best if you don't have any other funds at your disposal. The loan does not appear on your credit report either.
Wow. Thank you everyone.
I didn't know it doesn't appear on my credit report as a loan so that might be a deciding factor.
I think once I have enough money after the investment to leave the job, it would make sense to change what I have in the 401K to a self directed IRA.
The risk right now would be beneficial as long as I don't make a stupid deal.
@Bj Ayoleke Along the lines of @Steve S.'s comment on joint venture, if you have some personal funds and 401(k) funds, you can move the retirement funds into a SDIRA and personally partner with your IRA on the purchase of an investment property. You go on title with your IRA as joint tenants. You get the income from your percentage of ownership, the IRA gets the income from it's percentage of ownership. There are, of course, rules associated with partnership but it is great strategy if you are looking to grow your bank account and your retirement portfolio.
Oh wow @William W. Humphrey that is an amazing strategy. Didn't even think it was possible to accomplish something like that.
Now i feel that I really need to talk to someone about this.
Another question, if it was in a SDIrA, does that mean I have to use it to purchase the property in a whole or it can be used as a down payment on a property? Also if I wanted to use a hard money lender, how would that work.
Reason I ask is I found a hard money lender that could finance up to 90% of the purchase of the property and then 100% of the rehab. So if I was to use the SDIRA as a downpayment for the house and get assistance from hard money lender, how would that work when payments for rehab comes out of the SDIRA.
Guessing it up to the percentage of property the SDIRA will own?
you can finance property in your IRA but you can not use conventional loan. The loan must be non-recourse. Here is a list of lenders who offer such financing:
typically if you have 401k at a company that you are still working for you will not be able to rollover those funds until you are either leave that company or reach a retirement age.
You may check with your 401k plan administrator if they allow in-service distribution, which is not common but worth checking.
@Bj Ayoleke Your IRA can get a non recourse loan- this means you cannot personally guarantee the loan in any way. The recourse the lender has is the house, not any of your personal assets. Remember your IRA is a separate legal entity. Some hard money lender will lend on non recourse loans, you should check with the lender you have identified.
With respect to gaining access to your existing 401k funds that can be transferred to an IRA, or a solo 401k plan, you will need to check with your current employer.
Get a copy of the Current Employer SPD
One way of determining if your current employer will allow you access your retirement funds while still working for them, is to check the summary plan description (SPD) for the existing plan. The SPD is required to be written in a language or format that is easily understood by participants. Larger plans usually make the SPD available on the company’s benefits website. If the SPD is not available, the plan administrator or human resources department should be contacted for a copy of the most updated version.
@Bj Ayoleke You are correct. Think of your IRA as a separate entity, we can refer to your IRA as Uncle IRA. You can help him manage the IRA but you would not pay to have Uncle IRA's roof repaired, right?
If you partner with your IRA, so you are on title with your IRA as joint tenants, you are responsible for your percentage of the expenses and get your percentage of the revenue. So, if you are on title as a 50% owner, your IRA as 50% owner, you pay 50% of the HOA and receive 50% of the rental income, your IRA pays it's 50% of the HOA and receives 50% of the rental income.