Would you liquidate your 401k to purchase your first property?
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?
I would and have. There is no tax hit. Specially if you pay it back in installments. I'm paying mine back at the low $100's a month. I took out only $10,000. Comparing the stock market to the rental game or flip. It's out weighed by a long shot
@Justin Reyes Not to beat a dead horse but I also agree. I have worked in financial services since 06 and in almost every case, they used the money and were never able to replace it and lost half of it to Uncle Sam. If your ultimately going to do it anyways, see if they have a loan option that normally charges no interest and negates the tax implications. I wouldn't recommend either, diligently save for the time being is your best bet.
@Dillon Y. It’s not about risk appetite as you state in your last sentence. If you are ok forking over up to 40% for state and federal taxes and the 10% penalty and convert your liquid assets into illiquid assets then that’s what will happen. If the deal is damn good then I would entertain this otherwise more disadvantages than advantages to taking out of your 401k.
@Jonathan R.
100% agree. You have no control and don’t even know what your investing in with a 401k, mainly a risk tolerance level that is managed behind a curtain (low/med/high).
My W2 company matches 5% so it would be dumb for me not to use it, but once I built it up I was able to pull 50% and used it as a down payment. (Leaving the other 50% free money to keep growing) My main problem is that I am terrible at saving money, but I have good income, great credit and obsessed with making payments on time. So while it would take (me personally) years to save a down payment, I used the 401k and now have $100k in equity on that particular house since purchase 3 years ago at $12k down. I could now leverage that equity as a heloc for short term RE projects. I may not have purchased a second property without the 401k option though. Payment is taken out of my paycheck and I never even noticed it was gone.
And yes, this was obviously while the market was doing very well in my area and I did live in it for one year to take advantage of the low down payment.
It definitely is a decision based on your risk tolerance and experience but with a hot market the appreciation is growing faster each year than most young people can save in that time. If they can purchase the right property and appreciation continues (they are willing to take that risk), then it can open new doors that may not have been possible.
@Justin Reyes
Would not do that. You’ll have a big time tax penalty.
@Justin Reyes I recommend checking the specific “terms of withdrawal” from your 401K account. Many will let up take a loan against your money or pull money out specifically for the purchase of a home while avoiding penalties. They may stipulate that if pulling money out to purchase, it must me a primary residence or even your first time purchasing. So, give them a call and ask questions. If there’s a way to pull money from your 401K penalty free go for it! If there are penalties, take a closer look to see if it’s worth it to you to use that money. There are also many great low down payment options. Many cities/states also have government funded down payment assistance programs for first time buyers. Some specify that you need to a first time buyer...but not all. And check the definition of “first time buyer”. Here in New Mexico it means you can’t have had ownership in a home, or enjoyed the benefits of homeownership, in the last three years. Not sure about where you live. Good luck!!
I checked and I’m not allowed to take out a loan or hardship withdrawal even if it’s to purchase a home
@Justin Reyes
More tried this in 2007. They first lost their 401ks and then their pants. That’s all.
You may want to talk to a lawyer in regards to using your 401k and putting it into a trust and go about the process from there. As long as the funds are being used for any investment you be may able to exercise that option. Also Fannie Mae offers a Homestyle Loan program where you can purchase a distressed 1-4 unit property put down 5% for a owner occupied and 15% for investor use. You'll be able to fund a rehab project at 65% LTV. I would suggest saving up a few thousand more to cover closing costs, commission (usually 5%), associated costs, etc... You can sell the property after 6 months with no penalty. If not you can pay a lawyer to help you use that money to set up a Start up business where there's 1-2 individuals listed as members or employees. You may even be able to pay yourself a salary. The 401k business financing plan (ROBS 401k) is perfect for entrepreneurs seeking readily available funding capital, especially those looking for interest-free or no hassle business funding. This will allow you to fund a business with your retirement funds without taking a taxable distribution. Get yourself a financial planner and a good tax person.
I did this and it was the best thing I have done with my own money.
Like anything you better educate yourself and make sure you have a solid investment.
Check out Tom Wheelwright, he was in an episode of Clayton Morris’s a couple years ago and he agreed with taking control of your own money as well.
May not be for everybody- just wanted to say I used 401k money, took it out of Wall Street and put it into Main Street with good results. I got off the roller coaster and now own several steady cash flowing properties.
First off, great story, congrats on how far you have come.
A couple cautions to keep in mind is BiggerPockets is going to mainly select rosy stories for their Podcasts. The other highly risky thing is cashing out your entire financial safety net.
That being said you are young and seem responsible. You save and invest a high percentage of your income, rather than material purchases as many do. As long as you do that you'll be okay in the end.
I would talk to a financial advisor, accountant, and your plan administrator to make sure you have all of the information you need in your decision making.
Also, think about a backup plan in advance if it doesn't work out. You can probably catch back up by working OT and reducing expenses further. Again, you have 30-40 years to work and save it you need to.
I didn’t read all 8 pages of this thread but almost all answers on the first page were a resounding no! I think those answers are short sighted without having all the info in hand which is not exactly responsible in my opinion.
First off, it would certainly be a bad idea of cashing it out and paying the 10% early withdrawal penalty on top of the marginal tax rate you will be charged for fed and state income taxes. However, if you had a borrowing provision, that is a good option. If you have an exemption like a first time home purchase to skip the 10% penalty, that could be an option, but as others stated, why not use your real estate license and contractors license to build some additional income streams while continuing to save and use those funds along with learning creative financing strategies to acquire cash producing assets like teal estate.
Have a goal, build a sound plan to reach that goal with the help of a trusted financial advisor or CPA and get going on that path. Stop looking at what your friends are doing and start learning how they got there in the first place. Act from having sound info that is verified and not from the excitement or impatience of getting started.