Would you liquidate your 401k to purchase your first property?

187 Replies

Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?

Don't do it. Not in a million years, not only will you take a giant tax hit penalty for early withdrawal, but you are risking your retirement.  Just save other money enough for a down payment.  You can't do a 1031 exchange unless you already own real estate, the lack of experience here could be a killer.

Don’t pull your 401k money for any reason besides actual retirement. 

First there’s a 10% penalty. So your 30,000 just became 27,000.  On top of that it’s now taxed at regular income, so let’s say you are in the 15% tax bracket. There’s another 4,500 dollars so now you are at 22,500. And to throw insult to injury, you’ve never done a flip before and as most people have said here their first flip typically will cost them money or at best break even, so you lost 7,500 dollars to penalties and taxes and your first flip makes you zero dollars at best and that flip will take you 6-10 months.  

All the while if you had left that 30,000 in the 401k and it made 5% you’d have 31,500.  You essentially cost yourself 10,000 dollars to try something.  

    You could get a part time weekend job and save money tondo investments, heck find a partner that is doing flips and bring something to the table that they need, ie a deal and say you just want a sliver of the profit to be able to learn. They make money you learn stuff and cover your costs.  

Many 401k plans allow you to borrow up to 50% or $50k of the vested balance, whichever is less.  I did that to fund the rehab for my first flip to generate some seed capital.

@Justin Reyes A 401K is just another vehicle for gaining a return on your cash. The folks here say “don’t mess with your retirement,” but just as many folks will tell you their properties ARE their retirement plan.

Assuming your 401k is in standard stocks (say, the S&P 500), your retirement goes the way the stock market goes and with no collateral to boot. Whereas, with property, you’ve got potential appreciation (same concept as a surging market in stocks) but you might also earn cash flow, tax benefits, equity gain on your collateral, and...experience.

Cashing out your 401k is a decision only you can make. What I recommend is getting VERY comfortable with understanding the returns in property investing and then compare those returns against the historical averages of stocks. It’s all about making your money work hardest for you. Don’t let someone else’s risk appetite dictate your decision - let the numbers.

@Justin Reyes I would caution against cashing out the 401k or even taking a loan out of it (even if allowed).  You mentioned that you have a good income at your W2 job.  How long would it take for you to save up the same $30k if you were to aggressively save?  How much is the match at your employer?  I would recommend contributing the minimum needed for the match (free money wins every time in my mind) and then aggressively save for the first real estate investment.  With a high income and aggressive saving, you should be able to put away $30k in less than a year?

@Justin Reyes , I don't believe you can liquidate a company 401k while you are still employed there. Make sure you know the rules and risks of a 401k loan, and have a plan to pay it back up front. Make sure you are aware of what happens if you lose your job/ quit to work somewhere else/ company goes broke-- you need to have a plan for these situations too with a 401k loan.  

https://www.irs.gov/retirement...

https://ttlc.intuit.com/commun...

If I were in your shoes, I'd want a good sized emergency fund saved before even considering real estate investing .


@Justin Reyes I agree with the others that it doesn’t make sense to withdraw. You’re losing way too much money in penalties and taxes, and if real estate investing doesn’t work out for you you’ve also eliminated your retirement account. Not good.

I have taken out a loan though. I did it for a BRRRR so it was truly just a temporary loan. As others have said, most will let you take 50% of your balance as a loan and then you pay interest to yourself. Be careful though. 401k loans are usually a 5 year amortization unless you are buying a primary residence. This means the payments are big! Make sure you can afford it. If this is something you pursue call the bank that administers your 401k and tell them what you plan to do with the loan. Make sure there are no surprises. Some companies have rules you must follow - for example - some only allow loans for hardships. Just make sure you understand everything!

@Justin Reyes

Let’s actually look at using some of that money, but

Not taking a huge tax hit. So, do not withdraw that money. First, is that even possible? Many plans would require an actual emergency to do that.

I would look at taking out a 401k loan and do either FHA or a 203k loan (perhaps that's what you meant when you said 1031). People are saying never withdraw the funds. Well, a loan keeps you from getting penalized for early withdrawal. And, if you had done this in December 2018, or in 2018 at all, your real estate investment would have done better than the stock market.

Most important, always contribute up to your companies matching amount. Pretty tough to beat a 100% rate of return for doing nothing. Personally, I like to max out my 401k and invest in real estate. Diversification.

Btw: at 3.5% down payment for FHA loan, you could potentially get into a 2-4 plex for $10k or less.

@Justin Reyes Alot of people will tell you not to but if you have found a good enough deal to cover your (roughly) $10K cost in fees/taxes then why not? If you're that confident in your ability to find a deal to do that then that should give you your answer.

For example, a short term rental or large enough deal could give you a much higher ROI than the stock market to where within the year you could recoup your loss and be up more on your money than you would have if you kept it in there. You're young enough to where you don't need to act 60 with your risk/reward. You just have to figure out what your risk/reward tolerance is and move from there. Good luck man! I took a lot of my money out of stocks and I'm glad that I did. We now own 2 vacation rentals that do extremely well and have been a blessing for us at 29 & 32 years old. It was worth it for us to take that risk and it paid off for us.

I have met with a lot of wealthy clients during my legal career when I used to do estate planning.  A commonality I noticed was that many of the wealthy have a healthy mix of real estate AND stocks/bonds.  Yes, I had wealthy clients who were all real estate, or all stocks but the majority of the wealthy I met with had a nice mix of the two. I have always used that as my guiding light and aim for about 50/50 mix of real estate and stocks/bonds for my assets. So in short, no I would not liquidate or touch your 401k. I'd find another way to buy real estate. Work a second job, live super cheap for a while, etc....  Good luck to you.

@John Palley it’s just it feels like I’m sitting on the sideline watching all my friends become financially free off real estate and I’m stuck working a job. Yes my job is a good paying W2 but this is not what I want to do and I want to just take a risk and dive in. I’ve been learning a lot on real estate, like I said my friends are doing it, I have my real estate license and I have my contractors license.

@Justin Reyes

My wife and I pulled $10,000 from her 401k to help with the downpayment on our first house. I think the penalty is waved or reduced if you’re using it for that purpose but check with an accountant before you take my word.

The purchase and remodel of our first house led us to have $200,000 in equity and open a HELOC, we used the HELOC and savings for the purchase of our first flip whichever just sold and made solid money on. We were able to build that much equity because we live in a very strong market and we purchased before the market recovered from the crash, but just an example of how we survived pulling from our retirement unscathed 🙂

@Justin Reyes Patience young grasshopper, patience.  To be very blunt, when you start getting emotional (as referenced by your comment about your friends in real estate), you're about to make a really bad decision.  You mentioned that you have a contractor's license.  Why don't you or a crew pick up some work on that front and stack cash?  One of the biggest challenges that I have with the hot market (outside of finding deals) is finding a quality contractor crew that isn't booked out for weeks/months.

Originally posted by @Justin Reyes :

@John Palley it’s just it feels like I’m sitting on the sideline watching all my friends become financially free off real estate and I’m stuck working a job. Yes my job is a good paying W2 but this is not what I want to do and I want to just take a risk and dive in. I’ve been learning a lot on real estate, like I said my friends are doing it, I have my real estate license and I have my contractors license.

Justin- I would use that real estate license to wholesale and/or contractor's license to do some contracting work. Maybe you can do some joint ventures!?  If you have good contractor skills/contacts you could find a money investor and do some type of partnership on a flip!?  

Originally posted by @Justin Reyes :

@John Palley it’s just it feels like I’m sitting on the sideline watching all my friends become financially free off real estate and I’m stuck working a job. Yes my job is a good paying W2 but this is not what I want to do and I want to just take a risk and dive in. I’ve been learning a lot on real estate, like I said my friends are doing it, I have my real estate license and I have my contractors license.

Why not sell some real estate to make commission to then buy a rental?  Use that license you have spent money on to good use.

How much can you save in a savings account each month?  How much money do you need to start do whatever type of investing you are interested in?  Do some math, that’s when you can get in the game.  

A good paying W2 job is worth its weight in gold when it comes to getting loans and smoothing out the lean times in real estate.

I think you are seeing your friends with rose colored glasses.  Real estate is great but it isn’t magic beans that are going to give you lottery style winnings the next day.  I believe you said you want to do flipping, mmmm, that’s just another job.  

no you can’t withdraw if you work at the company for the purpose you want. You can take a loan for up to 50% of the money YOU have invested into your 401k. 

There’s always other ways to invest. Partner with one of your buddies, you bring the credit with a good job for the loan they bring the deal and you split it.  

 

Originally posted by @Justin Reyes :

@Philip Coiro that’s very inspiring! Thanks so much

 Completely not allowed for investing though.  That’s for owner occupied properties. Just to keep that in mind. 

@Justin Reyes

As a few mentioned your company might not allow you to liquidate it if you are still employed with them.

However you can take a loan to buy your first home and have 5 yrs to pay back. Use money to put as down payment using FHA loan on a duplex or triplex. You and your family live in one unit while you rent the other units. Fix up then sale after two years paying no capital gains (single up to $250k and if married $500k). Pay back your 401k and now have the money to do another deal or flip until you raised enough to buy rentals without having to live in it.

Given today’s current market take the time to educate and read, go to meet ups before jumping in. Best of luck

@Justin Reyes for sure a no vote.

Most 401(k) plans will not allow you to withdraw the money until you’ve had a “separation of service”. Meaning you no longer work there. Sounds like you’re still employed with this employer.

At best you could (if your company plan allows for it) take a loan for $15k (50% of your current balance).

In the meantime, keep asking questions - everyone on here is willing to help you.