Anyone pulling out 100k from their 401K penalty free?
Bradenton, FL · Member since 2017 · 168 posts · 39 votes
Anyone pulling out 100k from their 401K penalty free?
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Real Estate Consultant · Houston, TX · Member since 2020 · 206 posts · 944 votes
6y@Marty Summers
I personally prefer a self directed IRA with checkbook control. I work in North Carolina, where American IRA is based out of, and also work in Texas where Quest Trust is based. I personally prefer to go with the local IRA/401K administrator just because you can get local service. For example, Quest Trust is constantly putting on educational workshops and venues to get their clients educated and networked. I also use their Meetup space in Houston on a regular basis at no cost. They are big on community and helping you succeed, so the value is definitely there. One thing that I have not liked about Quest is that they are not supportive of the self directed IRA/401K with checkbook control. With American IRA, they are very supportive of this feature. So there are pros and cons to most providers.
The reason I like checkbook control is that many times in real estate investing you need your money quickly. If your money is “Administered” it means that each time you do a deal, you have to send in the deal to that Administrator and they will check the prongs of your deal to make sure you are investing properly so as to not expose your IRA/401K. This is based on someone who may make a mistake and violate the law and expose their full retirement account.
Each time you do a deal you will need to fill out the paperwork and then send it in to your administrator. This takes time and costs money. They will all tell you that they will get back to you, in most cases within 24 hours, but the truth of the matter is that it normally takes days because you are tied up with the bureaucracy. I have seen deals lost because of the time it takes to jump through all of their hoops.
On the other hand, if you have checkbook control, you control every financial transaction - from writing a check to wiring funds. Very fast and easy. The question you need to ask yourself is - “How well do I know what I can or cannot do with the IRA/401K?”
In our case, in order to avoid complications, most of my clients just lend the funds to an investor/flipper. Because they fund only, this makes any 401k questions obsolete. Most of the buyers we have in our group pay 12% and 3.75 points to the lenders. This is a solid way to make money. Remember here, the key is to make sure you know what you are doing. If you do, then you are safe. Many of the people I work with have IRA’s/401K’s. They all know the rules pretty well. They all network with each other and normally choose to operate on the safe side of things.
In the end, I think most IRA/401K companies are created equal. Their fees are about the same. They all claim to do it better than the other guy. What I have seen is that they all administer at about the same pace with similar fee structures. The thing that makes the difference to me is the one that will set you up in the self-directed checkbook control situation, but you must be a savvy IRA/401K investor or have people around you that know what they are doing.
30 Replies
- Investor · Buffalo, NY · Member since 2019 · 163 posts · 113 votes6y
I actually was just going to post about this, but decided to search the forums first. I've been thinking about taking the 50% loan from our retirement accounts just to have the additional cash reserves. It's very cheap money (1-2% custodial interest and 3-4% paid to yourself) and I figure it could be our padding should an extended lack of cash flow hit our properties. It could also enable buying aggressively when the market hits bottom.
- Investor · Member since 2020 · 324 posts · 278 votes6y
If you have an Amazing Investment that's worth it. Remember you do still have to pay taxes on it unless it's a Roth. The 10% penalty is waived, but you still have to pay ordinary income tax on it over a 3 year period. So keep that in mind when you're running your numbers.
Personally, I'm not buying anything until this summer. I'm going to see if the dust settles a bit and some even better deals show up. I know there will be opportunities out there. I'm just going to hold off and give things a bit more time.
Best of Success!
- Investor · La Salle, IL · Member since 2014 · 43 posts · 28 votes6y
I posted about this a while back and got some great feedback:
https://www.biggerpockets.com/forums/895/topics/825750-cashing-out-401k-due-to-covid-19-100-000-penalty-free?highlight_post=4858632&page=1#p4858632
Sounds like you want to take the $100k distribution and leave your career. If you qualify, you would avoid penalties, but have to pay taxes. If you can make enough in REI to justify the gains you'll lose by pulling $100k out of a tax advantaged account, it might be worth it.Alternatively, you could take a $100k LOAN, pay it back in 3 years (with interest paid to yourself) and avoid taxes and penalties. You probably have to stay employed. All you would be out are potential gains the account would have made over 3 years.
- Specialist · Houston Tx · Member since 2020 · 34 posts · 16 votes6y
As mentioned, the distribution is still taxable. You can take distributions from an IRA penalty free and you can take larger loans out from a 401k. Two separate transactions. IMO if you are willing to take a distribution and pay taxes think about converting the funds to a Roth IRA, keeping it in an IRA and do the investment with your Roth if at all possible. If the numbers are right, you will benefit from Tax Free Gains. Of course if you are finding yourself in a hardship and need the cash that is a different story.
This could be an opportunity to add a Roth IRA investment to your portfolio and that will be your favorite investment once you can take TAX FREE distributions in the future. Some food for thought.
- Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes6y
Originally posted by @Andrea Weule:
If you have an Amazing Investment that's worth it. Remember you do still have to pay taxes on it unless it's a Roth. The 10% penalty is waived, but you still have to pay ordinary income tax on it over a 3 year period. So keep that in mind when you're running your numbers.
Personally, I'm not buying anything until this summer. I'm going to see if the dust settles a bit and some even better deals show up. I know there will be opportunities out there. I'm just going to hold off and give things a bit more time.
Best of Success!
Keep in mind that a CARES Act distribution of Roth funds in a 401k are taxable (albeit with the ability to spread out over 3 years) with respect to the pro-rate portion of the gains.
- Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes6y
Originally posted by @Juan Deshon:
As mentioned, the distribution is still taxable. You can take distributions from an IRA penalty free and you can take larger loans out from a 401k. Two separate transactions. IMO if you are willing to take a distribution and pay taxes think about converting the funds to a Roth IRA, keeping it in an IRA and do the investment with your Roth if at all possible. If the numbers are right, you will benefit from Tax Free Gains. Of course if you are finding yourself in a hardship and need the cash that is a different story.
This could be an opportunity to add a Roth IRA investment to your portfolio and that will be your favorite investment once you can take TAX FREE distributions in the future. Some food for thought.
Keep in mind that a CARES Act distribution of pre-tax funds must be paid back to a pre-tax account (e.g. Traditional IRA). While you may be able to convert funds to a Roth IRA, the amount of such converted funds are fully taxable as 2020 income (i.e. no ability to spread out over 3 years akin to a CARES Act distribution).
- Appraiser · Valparaiso, IN · Member since 2015 · 121 posts · 62 votes6y
I asked the same question a couple weeks ago. I guess I worded it differently because your answer are better. I don't intend on paying it back. I am tired of the ups and downs and all I have averaged over the past 5 years is 6.8% at Vanguard with a 90/10 portfolio. I obsess over it and watch it. I know that's the nature of the beast, but frankly its stress I don't want. The way I see it, I am going to pay taxes on it at some point. Now it will be 22 to 24%. I am averaging 15% return on my rental income alone. With forced appreciation equity I will be ahead. Even without the equity, I take a hit of 7% return the first year. Then its all positive. I know Real Estate and am good at it. I understand it. Yes, I have a good understanding of mutual funds, the stock market, etc... but I hate it! My wife and I are actively looking for deals, but everyone is still stuck in the market we had 3 months ago. I have decided its worth it.
- Specialist · Ambler, PA · Member since 2020 · 15 posts · 10 votes6y
Another possible way to use your retirement accounts without the taxation when you take a distribution is to simply use a self directed retirement account like an IRA or 401(k) to buy the real estate. Some rules apply about your specific involvement with the investment and all the income generated goes back into the account. I have personally found much success using this method of investing to balance my retirement portfolio, so it is not hit as hard when the market is very volatile like it has been during this pandemic.
- Bradenton, FL · Member since 2017 · 168 posts · 39 votes6y
@Troy Forney. Your answer is exactly what I've been saying. I have to pay taxes on that money 10 years from now anyway. Also, Who wants to wait 10 more years to retire? We have built a nice portfolio and this 200k would be adding 4-5 more SFR's. I am not interested in hope and stress if it does not go my way. I want full control over my investments and these boom & bust in the stock market is why I see people working until they are 60. Not for me!
My biggest question now is....how do we justify the 200k withdrawal to the IRS?? We've all been affected so not sure if the IRS is going to fight people on this after they left this wide open.
- Appraiser · Valparaiso, IN · Member since 2015 · 121 posts · 62 votes6y
Marty, if I can justify it great. If not what's 10 more percent. Who cares. Small price to pay for freedom.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
I believe you can only pull it out if you were effected by the virus (ie. job loss or loss of income). The last thing you want to do is pull it out, then get audited and have to pay the penalties and taxes. To me its not worth the risk as you have I believe 3 years to put it back. Too much risk compared to reward if you were not effected. Saying you pulled it out to buy a property and were effected would set off some red flags. Just my 2 cents.
7e investments53 Reviews - Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes6y
Everybody is talking about the taxes, loans, etc. Anybody want to talk about the fact he will be locking in losses since mid February’s high? If you’re lucky, your portfolio might only be down 15%. Mine was down 30-35%.
So, 15% losses, 25-30% taxes. That $100k becomes $55k in a hurry.
- Bradenton, FL · Member since 2017 · 168 posts · 39 votes6y
@Chris Seveney Who WAS NOT affected by income during these times? I have a rental business and if one of my renters can't pay because of Coronavirus job loss..then that qualifies.
- Bradenton, FL · Member since 2017 · 168 posts · 39 votes6y
@Anthony Wick Lol...well actually you are wrong. I have been short the stock market for quite some time telling everyone a crash is coming. Here we are and I am not even down on the year. Lucky me....but I guess I'm smart..don't know.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
Marty
While you qualify for taking the $, it is my understanding you MUST use if for purposes which effected you. Using it to pay bills because loss of rent make sense. Using it to buy more properties, try explaining that one.
like the other programs out there, they have strings attached to them.
Originally posted by @Marty Summers:@Chris Seveney Who WAS NOT affected by income during these times? I have a rental business and if one of my renters can't pay because of Coronavirus job loss..then that qualifies.
7e investments53 Reviews - Appraiser · Valparaiso, IN · Member since 2015 · 121 posts · 62 votes6y
Honestly, for me personally, I have decided I don't care. Qualify or not, its worth it. You think that this stock market rally is real ? Its the Fed buying everything including etfs, etc... How long do you think they can continue this without consequences? I know, i know, over time the market goes up. I have done that for my first 20 years of investing. With Vangurd I have averaged 6.8% over the last 5 years which was supposed to be record market years. Real Estate over the past 5 years for us has average a 15% return just on the income. Anyway that's me. Everyone has what they are comfortable with. I am tired of trusting my investments to others. I can control real estate. I have paid the penalty before and turned that 60k into 150k in equity and consistent income of 10k a year.
- Bradenton, FL · Member since 2017 · 168 posts · 39 votes6y
@Chris Seveney Yeah, I get your point but it's just negative thinking. I don't see the IRS being interested in following your money trail to see where you spent your own money during a global pandemic. Really? They will be getting the taxes from it anyway. On a positive note...who cares that they twist my arm to pay the 10% penalty....it's only 20k on 200k. I make that up on the purchase anyway.
I started this thread on asking who is taking their money out from the new law.
- Bradenton, FL · Member since 2017 · 168 posts · 39 votes6y
@Troy Forney I am with you on this thread. I have noticed in 25 years being in the workforce this whole con job selling the public to invest into their 401k & IRA plans will bring them retirement in the end...what a joke! I have not met 1 person yet in my life that told me they retired early (like 50 or sooner) because they had so much money from investing into those vehicles. I remember all those years scratching my head why I could only invest 15k per year max? You will never have millions at that rate...maybe when you are about dead. I'm ripping our money out as soon as the timing is right. I am here to tell you that we have not seen anything yet in the markets. I think all of those folks that like to stare at their 401K statements are really going to be crushed soon anyway. I have been short and loaded up in the mining GDX sector for years leading up to this. I knew this was coming and have been warning people. Now it's time for me to gain my freedom back from corporate america using real-estate as our cash-flow machine.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
I mention it because there are a lot of investors on this site who Are novices and do not know a lot of the rules and seeing posts like this make people think they may be able to do things maybe they shouldn’t be doing
It’s like those who have a self directed Ira and using it for disqualified transactions. Will you get caught- who knows and what you do has no bearing on me, people should just be advised of the risks involved since a majority of people only look at returns on investments and fail to analyze risk.
7e investments53 Reviews - Appraiser · Valparaiso, IN · Member since 2015 · 121 posts · 62 votes6y
Chris, I agree taking money from your 401k is not usually a good idea. Especially if you don't know what your doing.
Marty, have you heard of Mr Money Mustache? He retired at 30 using mostly index funds and live very frugal. He's the only one I have heard of retiring early with that type of investment vehicle. My parents and both sets of in-laws retired with 401k's so it does work, but like you said not till your at least 59 and a half. My parents at 62, and also made 1 really good investment 30 years ago water front in Key West.
The IRS deal on the 401k is 100k. What qualifies I am not sure. I have read articles that said, you re-invest into stocks, they don't care. Your talking about 200k, I would be ready to pay 30% minimum and if they wave the 10% on the first 100k great you have more money. By the way, I see we are pretty much the same age and both in Indiana. Us Hoosiers gotta stick together.
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes6y
@Marty Summers. Every time someone talks about how they outsmarted the markets, I have to ask.....what were your returns the last 5-10 years? How long have you been "beating" the stock market? I mostly find that the people that have been calling for a recession for a long time have been wrong for years and years, and have now been correct for 2 months.
- Financial Advisor · Indianapolis, IN · Member since 2018 · 294 posts · 165 votes6y
On the topic of 401k withdrawals and loans, ignoring the costs and penalties seems somewhat short sighted. That being said, as long as you are aware of the risks, who can fault you for pushing for the ultimate liberation from the 9-5.
However, the fact of the matter is that more millionaires are made from a something as simple as a high savings rate than anything else. While you are somewhat correct on the limitations of a annual 401k limit, there are other after tax savings / investments that are equally important. Those after tax savings are the very things that drive most people's real estate purchases.
More importantly, owning a dozen rentals may very well be a full time job as well. I know our rentals take time and effort. However, there are plenty of more passive ways to build steady income in syndicates, private investments, etc, that can achieve similar results you are searching for. Limiting yourself to a plane jane vanguard accounts is as much to blame as anything.
Best of luck to you both. Happy hunting in our great state. Plenty of opportunities will be out there.
Danny McNulty, Financial Advisor in Indiana - Bradenton, FL · Member since 2017 · 168 posts · 39 votes6y
@Troy Forney I have not heard of that guy you mentioned but that has to be an anomaly for sure. Yeah, I mentioned 200k because it's per person (married). 100k from my 401 and 100k from her 401.
As far as the comments on this board, I am just amazed at human beings wanting to stare at a balance more than having financial freedom. People have been brain washed into showing others how much they have...etc. one guy on here had to point out how much I have lost over the years going against the markets. It does not really matter. What matters is that we have a lot of money to use to gain financial freedom early with owning real assets. What is so difficult about that? I love the comments regarding you should not put all your money into real estate because it's work?? Lmao! What kind of life does he think there is out there...sure maybe an occasional phone call to my property managers, talking with my accountant etc...lol. I also, don't really understand that dudes comments when he posts that on a real-estate investing forum. I've just learned that you can't get the returns anywhere in stocks that I am pulling from residential real-estate. 15% year over year is what we are clocking....These financial advisors always will tall you they are the experts...and the only thing they are great at is feeling you to death for their con sales jobs!!
- Appraiser · Valparaiso, IN · Member since 2015 · 121 posts · 62 votes6y
My thoughts exactly.
- Appraiser · Valparaiso, IN · Member since 2015 · 121 posts · 62 votes6y
@Marty Summers -Very Funny stuff, but so true. Even my dad was saying, you don't want to put all your eggs in one basket, but "it seems to be a pretty good basket". As far as work, I will take this kind of work any day over the stress of a fake stock market. None of it is based on fundamentals anymore. When a property becomes vacant, we assess it. Rent it again or rehab it. If we rehab it, the amount of work is up to us. Call a contractor or do it ourselves. After 15 years of rehabbing houses mostly ourselves, I prefer to call the contractor. Actually the first was 1996. So in 24 years about 10 properties that my wife and I have done ourselves. I am sure many have done many more, but the point is... I am tired. Now we meet contractors, make phone calls and write checks. I will take that any day to more than double my return.
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