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

Rental Property Investor · Milwaukee, WI · Member since 2019 · 46 posts · 63 votes

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?

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Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

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.

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Justin Reyes
OP
Rental Property Investor · Milwaukee, WI · Member since 2019 · 46 posts · 63 votes
7y
@Jason M Gordo yes your right. What if I say that I can get released from work, take out my 401k and then get my job back on a “Last chance” program at my job and don’t lose any pay or seniority.
0 Reply
Collin Cameron
Member since 2019 · 17 posts · 15 votes
7y
@Justin Reyes I’ve been thinking about the same thing...
Does anyone have a thoughts about what would the advantages of a 401k loan vs a HELOC or even a cash out refi?
2 Reply
Jonathan R.
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
7y
@Justin Reyes 401k companies have brainwashed too many people into being afraid to control their own money. Blow the 401k up, keep contributing, but for me, the 401k is a tool to fund my real estate career. I don‘t like the quit the job and get rehired idea, just re-enroll in 6 hours of school and do a hardship withdrawal, maybe your company has tuition reimbursement and you do well there.
Who cares about penalties for selling the 401k, what can you write off that you couldn‘t before now that you have a real estate company? Control your money, control your destiny. Get it out of the hands of the greedy wallstreet banker.
19 Reply
Albert David Penney
Member since 2019 · 8 posts · 0 votes
7y
@John Palley did you attend CESLA by chance?
0 Reply
Bryan MitchellPro Member
Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
7y
@Justin Reyes, as some others have mentioned, some retirement plans allow you to take out a loan. The government Thrift Savings Plan allows you to borrow up to $50k if you qualify. You pay yourself back with interest. Yes, you pay yourself interest. I like that. Best of luck brother!
3 Reply
Sean Ybarra
Rental Property Investor · Redondo Beach, CA · Member since 2018 · 47 posts · 22 votes
7y
@Justin Reyes
Justin, I’m going to go against the grain here and say yes on the caveat that you speak to a cpa first. There’s some conditions where you can liquidate your 401k without taking that big tax hit.
My reasoning is this, a dollar today is not worth as much as a dollar tomorrow. Due to inflation your 30k you have today won’t have as much power in the future.
Real estate however can be turned in to a constant stream of income. Once you have a property and build some equity you can pull that it to invest further or even buy in to index funds/dividend stocks or another property.
Speak to a CPA, and a loan officer since they’d know better, see how much you can qualify for and if there’s anything you need to pay off to qualify first.
3 Reply
Ricky Davis
Investor · Searcy, AR · Member since 2018 · 53 posts · 39 votes
7y
Justin, I am going to be the guy who says maybe, maybe not. Yes you will pay penalties. BUT, what if the market rolls over and you lose 40% of your money?? What if the Democrats take over and raise taxes?? You may on only take a hit now but you may take a huge hit later on!!! You can't spend your 401k while it is sitting in someone else's hands also can you control what Coke or Walmart or any other publicly traded company does? But you can your own piece of real estate and if you don't you are going to have to wait another 32 years to use it. Maybe it will grow 5% a year. I no longer contribute to a 401k and I am 52 and wish I had all of my money out of it. Yes, you need some cash or gold and I mean actual gold that you can sell if you need extra cash. learn what inflation is and how it affects you. if I were you I would listen to a lot of RICH people. I don't mean folks who have 10 houses or a million dollars. I mean folks who have 20 million or have 500 units. How did they get there? what do they do? What mistakes did they make? what they would do differently? Read, listen to pod casts, study the rich. I have learned some financial planners have it in for their best interest not yours. Good luck on what ever you choose and do what fits your needs.
8 Reply
Brandon Ingegneri
Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
7y
@Justin Reyes 100% do not touch that money. I have something similar for municipal workers called a 457. I have made that money and my Roth my fortress of solitude money for retirement just in case something we’re to happen. If it does, I know that I am still paying myself first and contributing to my retirement no matter what and will have a pot of gold at the end. Additionally, you want to take advantage of the compounding interest that only being young and having time for growth will allow.

I MAX out my 457 every single year. I MAX out my Roth every single year, and I have a few other investment vehicles that I fund. Other than my living expenses and reserve account, every other penny goes into my portfolio.
1 Reply
Matthew MorrowBusiness Member
Investor · PA - NY - NJ · Member since 2019 · 924 posts · 327 votes
7y
@Dillon Y
Perfect answer. Everyone here has different backgrounds and motives, and it’s hard for each of us to put ourselves in your shoes.
Talk to your accountant, but in the end- do whatever makes the most sense for your situation.
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1 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y
How did you save that much in your 401? You prioritized saving and paid yourself first. Do the same thing with your spending. Tighten your budget and drive a beater.

As has been said, you can't just withdraw 401 money while still working there. Certainly can't 1031 what you don't own yet. Close only counts in horseshoes, hand grenades and stretching carpet. Save and learn.
0 Reply
Ola Dantis
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
7y
@Justin Reyes Hey Justin, I would YES absolutely 🤗
Now, there is a caveat: Please do not request an early withdrawal but a LOAN, as an early withdrawal from your 401k warrants a penalty and, frankly, it is an overkill.
However, you can "loan" yourself money from your 401k and pay it back over, say, 5 years and the monthly payment is taken from your paycheck biweekly.
Many people either don't know about the fact that people can borrow themselves money from their 401k or they confuse it with early withdrawal.
I think you should log onto your 401k online account and see if you have loan options OR call them. You may be pleasantly surprised! 🤗
NB: The loan amount is usually lower than the early withdrawal, so in your case, the loan might be, say, 15k and not the full 30k but I'm sure that's a start.
1 Reply
Wei Jie Yang
New York City · Member since 2018 · 161 posts · 75 votes
7y
Why not just lend half of that to yourself and use it as a down payment? Avoid the fees and tax penalty and you're able to use half of what you originally wanted. You can choose to pay it back in 5 to 15 years so long as you don't quit in the meantime.
1 Reply
Justin Reyes
OP
Rental Property Investor · Milwaukee, WI · Member since 2019 · 46 posts · 63 votes
7y
@Ricky Davis Yes I agree with you. Study the rich. Every time I hear someone’s story on the Bigger Pockets podcast, they always say they took a huge risk and now own xxx amount of properties. 8 years ago I used to be homeless living in a abandoned house for over a year not knowing where my next meal will come from. I end up getting a job at Home Depot and saved up all my checks to buy a car, and then got a better paying job. I know what it takes to put in work and I’m not scared to fail because I truly believe there is nothing that can’t hold me down. I’m going to take this risk on taking out my 401k and I promise I will share a success story later down the road. Thanks again to all of you people that took the time to give me advice. #AppreciateIt
5 Reply
Will Tse
Rental Property Investor · Naperville · Member since 2019 · 23 posts · 8 votes
7y
@Justin Reyes
Yes it's a good way to do it . You can "Borrow " against it . But dude maybe 30% of it and some do your own cash if possible . And the BRRR it . Unless you have no other choose but to use all 30k but pay it back after you BRRR it
0 Reply
Abel Pacheco
Rental Property Investor · San Antonio, TX · Member since 2018 · 16 posts · 31 votes
7y
Also, you asked a question about your employer potentially “releasing” you and then hiring you back?

When I was "released" from my employer I was able to convert my 401k to a self directed IRA (Equity Trust and Qwest are 2 companies among others that allow for this) without penalty. Then once in a self directed IRA I self directed $50k to invest in my first multi family deal (128 units). Caveat*, if you purchase RE through your IRA you or your family cannot live or even stay in the property. So single family may not be the best investment with a SDIRA. Which is why I chose to invest in Multi Family as a passive investor. I would not be living in the property ever. Also, In a self directed IRA it does grow in a tax shelter position, but you don't have the greatest k-1 paper loss that cash investments provide.

I like a couple others said agree that only you can make that decision based on your risk tolerance and determination to beat the 401k compounding interest stock market odds. Speak to some CPA’s but I would search for RE specific CPAs with some investment experience themselves.

When I was younger I chose NOT to invest in my 401k and bought a house every other year instead. I have 8 SF properties today and would not have been able to do so if I was contributing heavily in my 401k. As my W-2 increased my CPA advised I needed to contribute to my 401k to avoid taxes so I did. But a few years later I stopped again :) because I learned how to avoid W-2 taxes at a greater rate through 100+ unit multi family syndication investments. I’m currently a fractional owner in 500+ doors because I chose not to invest in stock market but rather RE.

Your CONTINUED perseverance and determination through the market ups and downs will lead you through the other side to success.

14 Reply
Adrian Smude
Rental Property Investor · Plant City, FL · Member since 2015 · 1k+ posts · 379 votes
7y
I would not. If you can move your 401K into a Self Directed 401K I'd do that and lend the money to investors. Safer & great returns!
3 Reply
Justin Reyes
OP
Rental Property Investor · Milwaukee, WI · Member since 2019 · 46 posts · 63 votes
7y
@Abel Pacheco TEACH ME! Put me under your wing your doing EVERYTHING I dream about.
3 Reply
Tim West
Real Estate Investor · Bonney Lake, WA - Washington · Member since 2016 · 58 posts · 35 votes
7y
There are other ways to get loans for investment, so touching your 401K seems like a premature move if you haven’t explored other options.
Like many others on this thread, I too have taken loans against my 401K in the past when I had to, but it’s certainly only something to do if you can feel confident about meeting the payments, timeframes, etc. I think the decision is impacted more if you have significant investment in the 401K, as $30K vs. $300K for example would present different options and consequences.
There are several ways to get unsecured loans, and I have used several, such as Lending Club and Lightstream, both of which were great low interest options that allowed for quick investment capabilities with relatively little impact, and multiple pay back timeframe options. Credit score certainly helps here.
I agree with both sides, don’t touch it unless you understand what your potentially impacting long term, but also remember that you want your money working for you. What I can tell you is that you should be thinking about how to not be counting on any one source of income or investment for retirement, as there are no guarantees and you need to be creating multiple streams of income to give yourself a higher chance of success. Good luck to you!
4 Reply
John Nachtigall
Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
7y
@Justin Reyes
No way the math works. 30k invested tax free for 30+ years in an index fund beats any property you would buy. Certainly when you add in risk/reward.
- S&P has returned 10% yearly average (dividend reinvested) for the last 100 years. You have 30+ years to retirement so any recessions are irrelevant , you will go through at least 4. It requires no skill, no thought, no education, no fees (0.02%), no advice.
- You are brand new to real estate. You have no experience picking properties, managing them, and no capital reserves. Even if you pick a property that earns and equivalent 10% return you still pay taxes and it is not compounding.
Until you max out your 401k each year any other investment won’t come close to the simple math and risk/reward. 401k only require contributions and patience. You can do it. Grow your career and income, max the 401k, then consider the real estate to supplement it.
1 Reply
Eric Lau
New York, NY · Member since 2019 · 60 posts · 82 votes
7y
@Justin Reyes
I liquidated an old 401k from a previous employer at around 50k.
Yes you get taxed but you still get taxed later at retirement as well. Maybe just a different bracket depending on your earned income at retirement age. And for real estate investors that will not be low.
I also couldn’t contribute anymore because my new CIty job does not roll over 401k, city jobs has a 403B. Similar but not the same family.
So I cashed out my entire 401k after 3yrs of not contributing. Originally I was just going to let it compound....then I stared to think investing in rentals.
The 50k after all the tax and 10% “penalties”. I just call it fees or robbery...call it what you want.
Got me into two single family home and two (2unit) all rented.
Do what makes sense to you. If you ever follow what every one else tells you. You will just be working and never touching your 401k till your 65.
Make it your story not theirs.
3 Reply
Frank Maratta
Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes
7y
@Matt Pastier
I took a loan out of my 401k to complete my last BRRR. And yes a personal loan is a 5 year amortization but a primary residence is a 20 year. Just had to provide them a copy of the sale contract. I anticipated my budget and took the loan out and provided the contract when the contract was actually signed (the date on the contract has to be current so you validate your claim for the 401k loan going towards the house - I have gotten denied before on another deal that had problems at closing because the date was past the 30 day mark). They didn't make me prove that this was a primary residence either. The check showed up in the mail within a week.
Some people make the arguement that taking a loan out of your 401k is a financial disaster since you are paying interest that has already been taxed to go back into your 401k. And if your were to empty your 401k this would then get taxed again. Also I believe the 401k does not grow as much as it would with the loan against it due to missing out on dividends. I am not sure on this if someone could enlighten me.
My thoughts are that a 401k loan is OK to do. I don’t know any other loan you can take out that you don’t pay interest on other then life insurance (which not all of us have). I have 1/4 mill in cash reserves right now and I owe $30k to my 401k. I could pay it off but I would rather have access to the cash for a down payment on the next apartment building that comes into my sights.
To answer the OPs question, I would not empty your 401k until you have more expierance with real estate. I would take the loan rather than empty the 401k. You can take out a loan on 50% of your 401k balance. I am not against emptying out the 401k either, but wait to do this until you are confident you can get better returns in real estate than your 401k does. I plan to completely empty my 401k when I quit my day job. And now might not be a bad time to do it with the uncertainty surrounding the economy.
2 Reply
Matt Pastier
Real Estate Agent · Central Florida · Member since 2013 · 118 posts · 102 votes
7y
@Frank Maratta That was my point. For my 401k the longest loan is 10 years (not 20) and it’s for a primary home purchase only. That’s why you have to check the rules carefully in advance because they are not all the same.
0 Reply
Ola Dantis
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
7y
I'm sure Justin you've got your consensus here. At the end of the day, it is your money being managed by some brokerage who charges ridiculous fees.

I really don't see why some think buying Real Estate with that money is irresponsible or premature. 🤔

Real Estate still continues to be one of the surest of all asset classes in the world and it has been for centuries!
4 Reply
Frank Maratta
Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes
7y
@Matt Pastier
Yes they restricted me to a primary residence as well and I had no issues with that aspect even though the property I bought was an investment property.
0 Reply
Joe Martella
Rental Property Investor · Cherry Hill, NJ · Member since 2015 · 626 posts · 495 votes
7y
@Justin Reyes I think that your impatience will be a killer if you do it. You need to educate yourself first. I suggest that you listen to podcasts, read some books (Rich Dad, Poor Dad is a good starter), before you start messing with your life savings. I too had that same dilemma. I have almost $500k in my 401k. I was going to purchase a property cash, fix it and then rent. While I would have taken a massive tax hit, the depreciation and other deductions should have leveled it out some.
Long story short, I decided not to. I had enough cash in the bank to put the 20% down, get a conventional loan and personally finance the rehab. I am now working on refinancing the property and cashing out almost all I have invested in the deal.
The key here is to have a plan. Know what your expenses are, know what your profit margins are with good room for error and if you are going to get your money out of the deal. If you plan on cashing out that money and turning it over at least 2 times a year then the tax consequences may not be so bad.
Messing with your life savings without knowledge is what makes this move risky.
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