Questions on pulling out a 401k early

4 Replies

What would be the better option when purchasing a first home, cashing out early your 401K, using that money as a lump sump down payment and facing the tax penalties, or making a smaller down payment and facing higher interest rates long term?

Hello and welcome to this site Luis!  There really is nothing good about purchasing you own unit.  It not only typically keeps you in the same place for too long and not being mobile enough to go to the best market.  By the time you aad all the other expenses like furniture, maintenance, and property tax and adding all of your dept payment it's barely even a break even deal.  I live just outside of Dallas, Texas and bought it in 1984 and paid off my mortgage about 22 years ago.  Even though my house is worth about 2.5 times what we paid for it originally but when you add in all the other expenses we'll be lucky to break even.

At best, a home could be looked at and bought as an investment, it rarely is.  Houses are really a liability, not an asset.  We have been brainwashed to believe what is not real and to listen to our family/parents who have been telling us the wrong things but they grew up in different times.  The sooner we realize that all of the negative things we were taught and told were bad, we'll be better off.  All of those lies we were taught growing up are not true and the sooner we realize that, the better chance that we will succeed and we will believe in what's true.

You will probably be better off by not spending your money on those rural rent houses built years ago no matter what you are being told. I have also learned that 401K's are pretty much useless but you can borrow from some of them at a rate you set and that could be useful to fulfill your needs. Something I learned to late is to convert them to a tax free account and make up the tax and penalty by possibly being able to invest in a place other than the stock market by having a true self-directed IRA.

If I was younger and was more aware how things worked I would be much better off when, and if I did, retired early and spent my later years on retirement by having financial freedom.  Even though I am 62, I hope to have a few years of actual retirement doing the things that are enjoyable and being relaxed with some saved money and investments still providing me with money.

I know alot of this is probably hard to believe but my attempt is to inform you not feeling too shocked at what I said and wanting to be believed.  Always believe in what really works and to hang out with like-minded people with some of them are already successful in doing what you want to do.  The 401K's are just a way to save your employer some money and the IRS will get their money sooner or later.  Do not count on anything that depends on the future.  Not that it cannot be predicted but usually count on the present.

Unfortunately, I have spent the last 7 years being bedridden and not being able to work but it has given much time to learn about real estate learning.  That happened totally unexpected with having those medical problems but I am still hoping that that will pay off someday.   I'm lucky I'm still married and supported by my wife and my mother who pays for my full time nurse.  Even though my life has had some bad moments, I am glad that I am still alive.  Even though I had a brain annurism and a stroke my wife elected to keep me alive and I hope to be able to pay her back someday.

I'm very lucky that I had a flexible schedule and was able to spend much time with our daughter until she was 15. She is in her last semester before graduating the University of Arkansas. Maybe you can get an equity loan on your house or you might apply for a FHA insured loan that helps you get started. Just know you will have to own about 20 homes just to cover your monthly bills. If you choose to buy apartment complexes you will have 1 address instead of 20 with homes.

Know that there is good debt and bad debt.  There is nothing wrong with good debt.  Just buy rental units that have positive cash flow on day 1.  Always know that positive cash flow is more important than the price.  Always treat rental units as a long term investment.  When starting out and do not do anything that is unique.  Just do what is average and do not cut any corners.  Location is usually important.

Good luck to you!

Originally posted by @Luis Valdez :
What would be the better option when purchasing a first home, cashing out early your 401K, using that money as a lump sump down payment and facing the tax penalties, or making a smaller down payment and facing higher interest rates long term?

 Higher interest.

When you pull from your 401K, you are paying your tax rate, which now goes up because all of the withdrawals are taxable.  PLUS you get hit with an additional 10% penalty.

So say you were in the 25% tax bracket, you pull out $100K, they take out 25K for taxes+10K for the penalty.  So you actually get $65K.  IMO its just not worth it.

What you could do, and there are some risks if you don't repay it, but more 401K plans have loans available.  You might consider one of those for a down payment.  Especially if its a personal residence.

Best way to improve on losses is to supplement your income by house-hacking.  Get a duplex (at least) and rent other units.  If the government takes 10% of your 401k cash advance, remember you can make 10% year after year!  So many people get hung on the one-time fee and they don't consider the yearly returns from their investment.  

If it's your first house, make sure it's a multifamily!  It probably won't be your "forever" home so make it a good investment.