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?
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.
No for the many reasons already listed. The 401(k) is a great LONG-TERM tool to build wealth. Take advantage of the employer match and save more on top of that if you can.
You also stated you have a good job so figure out a way to increase your savings rate to make the down payment on a property. Once you've saved enough for your first down payment and get your first property secured, then begin reinvesting the earnings from that investment on top of your savings rate to get into the next property. Then rinse and repeat. As you get better and more comfortable you can get into more creative financing strategies that requires less of your own money to get into the deals.
Your 401(k) will grow and your rental portfolio will grow faster and faster and will allow you to take advantage of leverage. Having a nice equity portfolio also makes the lending process much easier. When my lender looks at my personal financial statement and sees I have a large stock equity position it makes borrowing money for real estate and other investment projects a breeze. I have financed several projects 100% through traditional bank lending because of this. They are willing to do this because they see I have a large liquid position that I can easily access if I ever get myself into trouble. Balance between stocks and real estate is important!
@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.
@justin Reyes - I have no advice on getting released, then re-hired via a "last chance" program. Are you 100% certain that you'll get hired back at the same pay and seniority? Sounds very risky to me if this job is your current economic engine.
Question: do you own a home now? If so, does it have any equity?
I would work a side job, save 100% of the money from that job, take a few real estate classes, network with R/E people in the area and save for a down payment. In the meantime, I would be looking for great R/E to buy, get it under contract and then work aggressively to find a partner to buy the home with me. This works. However, you have to do all of the work upfront.
As for your 401(k): continue to put money away. You will NEVER regret having multiple pockets of money. Real estate is just one way to fund a retirement, stocks and bonds are too. I believe in an equal weight of Stocks + Real Estate in my portfolio. That is just me. I own several properties and have a liquid retirement plan that matches it, stocks + real estate go up and down. Bottomline, no one on this board can make this decision for you, we are all unique in our goals and ways of getting there. However, we are all here to ask questions and help one another gain clarity.
I think it's a good idea to diversify across various assets classes.You never know which ones are going to rise and which ones are gonna tank.
@Justin Reyes I would take a loan out against your 401k and use that money but don’t cash out you waste way to much that way.
@Mike Dymski I also did the same Mike.
And very glad I did I bought a multi family property with 3 apartments.
There was no penalty at the very small company that services the 401k.
@Aaron K. good advice aaron ! thanks for sharing i appreciate the knowledge on what steps not to take <
I think it depends what stage you are at, just starting out I would be looking for other options than liquidating the 401k.
House hack with a small down payment if you have good income, use a 0% credit card for any rehab costs as long as you have the ability to pay back.
If you decide to go all in on RE and looking for passive income to provide retirement income, then I wouldn't be scared to liquidate my 401k to get into the right deal. Doesn't sound like you are there at this point.
@Justin Reyes these guys are right about penalties
We all do diff things with RE investing. Save enough for a down on a FHA loan and buy a 2 to a 4 plex residential loan. You can also get rehab dollars added to the loan if needed. But for 3.5% down it's a good deal. This will give you a place to live and get a feel for doing rentals. Patients...keep your job.
Justin, I like the loan idea. I've done that, pay yourself back w\ interest.
I'd also think about reducing your 401 contribution, and then tuck that $ away for your first REI. House hacking is a great investment (not flipping). If you don't have experience w\ flipping, stay away from that model (my opinion).
I plan to siphon from my 401 to accelerate my REI's, but that's 1 persons plan. It's your money at the end of the day. So do your research so you know the penalties, and what you're going to get out of the transaction. No one will take care of your money like you will!
Best wishes
Rick
You wouldn't be able to pull it all out unless you quit. Now if it was 300k then I would suggest it. Give Uncle Sam his money, he's going to find a way to get it anyway. If you know that this is what you want, you'll make that money back x10 if you put in the work.
I would argue that the answer is not a flat no but instead, it depends.
If you take out your 401k for a rental investment there’s a 10% early withdrawal penalty and it is taxed as regular income (unless it’s roth). This can easily can cost 5k+.
A better option would be to buy your first primary residence so you can take a $10,000 distribution from an IRA without incurring the 10% tax penalty, although that $10,000 would still be taxes as regular income (unless its roth).
Depending on your 401k plan you could take a loan from your 401k.
Another option is to roll your plan into a Self-Directed IRA which can directly invest in real estate.
It depends how good the deal is and what your personal finance situation looks like to save up the money.
@Justin Reyes
I'm shocked at how much response this question has received!
If you still work there, I say take a loan against it. Little risk there.
If you don't still work there and want to cash out, I say sure, go for it as your last option only. And it should never be your last option. 😉
A very important point is whether you invested it as a Roth or not. Roth contributions can be pulled out tax and penalty free (because you already paid taxes on them). Again, that only works if you are no longer with that employer.
There are a hundred ways to invest without pulling this money out, as the others have mentioned...
@Michael Slockers yes I’m super shocked on how much attention this question is getting a lot! I’m extremely grateful for all the advice. To answer what a lot of people is saying about finding other ways to invest, there is no other way. I don’t have any friends or family that will help me and I don’t have a 700 or higher credit score. I’m just hungry to jump in. I feel real estate is my calling.
If your plan allows you to borrow then look into it. My plan allows me to borrow at a certain interest rate but the interest goes back to you. So it’s not so bad.
If it doesn’t then I wouldn’t touch it. Unless this is the deal of a life time and you are 100% certain you’re going to kill it on this deal.
Diversity is key when it comes to investing.
Interesting question. Pulling out all of my 401k monies is exactly what I did for my first rental purchase. I had 42,500 dollars after contributing for 9years. I could see the writing on the wall. I would never reach the critical mass point where my 401k would pay for my retirement. I paid the 10% early withdrawal fee. $4250 dollars. Found a property that was listed for 118k. Offered 112,500 (in my mind, got my $4250.00 back), put 20% down, as it was an investment property.
The small amout of rehab that I did, about 8k's worth, offset the additional taxes as income for the year. Meaning I didn't OWE any taxes at tax time even though I had 'earned' an additional $38,250.00 dollars that year. Still had $5000.00+ reserves for any unforeseen troubles. And it worked.
Now, 3 years later. I am selling for 165,000 and rolling the funds via an 1031 exchange. Onward and upward.
Cheers!
@Justin Reyes IF the numbers make sense yes,,,,,,,,
Good luck
@Justin Reyes No just no. 60 year old you won’t be happy at 30 year old you
@Justin Reyes
It depends on your tax bracket: If your tax bracket is low-withdrawal it now and pay the penalty. If your in a high tax bracket-take a 401K Loan instead.
If your balance is $30,000-Most providers allow you to borrow up to 50% of your balance ($15K). Any interest you pay on the loan goes back to ur own account.
If you did an early withdrawal you would pay the Fed a 10% penalty and depending on which state you live in another 2.5% penalty on top of federal and state income tax.
But I will say 401Ks are mostly a scam for the uneducated. These are my main take-aways:
1: It was an experiment conducted by WallStreet and the Govermnent back in the early 1980s so businesses could offload the liability of the pension systems onto the the employee.
2: People love when their employer matches but what they don’t realize is for every $1 dollar your employer matches, it’s $1 less dollar they are paying you in salary so it’s really not costing your employer anything to match.
3: WallStreet is collecting fees on ur 401K contributions. They don’t want you to know this so most people don’t realize this.
4: You can't access your money till age 59 1/2, and at that point they tell you it's better to leave your money in or roll it into an IRA to avoid paying hefty income taxes. Financial advisors advise you to instead take what's called the "safe-withdrawal rate" so you don't outlast ur money by the time you die. (4%). So if you have $500K at retirement, you can safely withdraw $20K per year and also pay taxes on that $20K. And they call this the "American Dream".
5: At age 70 1/2 they make you start withdrawing your 401K balance so the government can collect income taxes on ur money before you pass away.
6: The real winners in the 401K system are WallStreet and the Government. The real losers are long term 401K contributors. Your 401K balance is just a number on a computer screen-you can’t eat it. But you can eat cash flow from cash producing assets-that’s a fact.
I'm forgoing my 401k and putting everything into real estate. So far, I haven't regretted it a bit and I don't think I ever will. Life is too short to always play it "correctly" and safe. If it were me, I'd do it 100%, but I know I'd do anything to make it work. If you're not serious about real estate, I definitely would NOT do it.
@Justin Reyes I would say yes. For most people who only do the minimum to get the 100% match, your 401K balance is about 40-50% employer contributed funds. The 10% fee and the taxes you pay on it is in the end paid for by your employer and you‘re still left with some of their contributed money.
Everyone says get the employer match from your 401K at a minimum, but that just takes 3-8% out of your net take home pay. And you have to continue to do that to get the match. You can buy property, do the 20K down one time and make $200/unit for the rest of your life without having to put any money away in an account you can‘t use for another 40 years. Stick the dollars you would have contributed along with your rental income into a high-yield savings account where you get 2-3% and buy another rental in a few years.
The math pans out and you will always have a bigger nest egg in retirement going the real estate route than the 401K route...
Just make sure the properties you buy cash flow positive. Otherwise it will set you back for a long time.
@Justin Reyes
It depends on your tax bracket: If your tax bracket is low-withdrawal it now and pay the penalty. If your in a high tax bracket-take a 401K Loan instead.
If your balance is $30,000-Most providers allow you to borrow up to 50% of your balance ($15K). Any interest you pay on the loan goes back to ur own account.
If you did an early withdrawal you would pay the Fed a 10% penalty and depending on which state you live in another 2.5% penalty on top of federal and state income tax.
But I will say 401Ks are mostly a scam for the uneducated. These are my main take-aways:
1: It was an experiment conducted by WallStreet and the Govermnent back in the early 1980s so businesses could offload the liability of the pension systems onto the the employee.
2: People love when their employer matches but what they don’t realize is for every $1 dollar your employer matches, it’s $1 less dollar they are paying you in salary so it’s really not costing your employer anything to match.
3: WallStreet is collecting fees on ur 401K contributions. They don’t want you to know this so most people don’t realize this.
4: You can't access your money till age 59 1/2, and at that point they tell you it's better to leave your money in or roll it into an IRA to avoid paying hefty income taxes. Financial advisors advise you to instead take what's called the "safe-withdrawal rate" so you don't outlast ur money by the time you die. (4%). So if you have $500K at retirement, you can safely withdraw $20K per year and also pay taxes on that $20K. And they call this the "American Dream".
5: At age 70 1/2 they make you start withdrawing your 401K balance so the government can collect income taxes on ur money before you pass away.
6: The real winners in the 401K system are WallStreet and the Government. The real losers are long term 401K contributors. Your 401K balance is just a number on a computer screen-you can’t eat it. But you can eat cash flow from cash producing assets-that’s a fact.
Good point on #2. I used to work for a company that did NOT provide 401k matching. Instead, what they did was participate in a program that allowed you to convert your year-end bonus to an employer contribution to your 401k. This would allow you to contribute around 56K to your 401k. My co-workers would moan and ***** about the lack of a matching program, but what these idiots didn't realize that the bonus and the matching was all coming from the same profit-sharing pool. The company could match, but that would lower your year-end bonus by a collectively commensurate amount. If you want to rely on your 401k, the employer contribution conversion option is MUCH better than employer matching.
My main problem with 401K's is the scarcity mindset with which it operates. You can save all your life and retire with 1 or 2 million in your retirement accounts. But you'll never feel good taking money out of these accounts. Much better to have a passive income portfolio of real estate holdings (direct or syndicated) which, BTW, is far more tax friendly than these retirement accounts. And you are absolutely correct on the history behind their formations and the corrupt motivations behind them. Much better to utilize a strategy that humans have been utilizing for thousands of years instead of something that was recently invented by Wall Street (this is coming from someone who works in Wall Street!, hehe).... i.e., buy income-producing real assets like land and real-estate and do everything you can to grow your portfolio.
I would personally say no to a 401k. That's a big loss in fees. Maybe taking the contributions out of a roth would be a better idea if that applies to you
@Justin Reyes
There is no reason to fully cash it out. I have used 401k loans on three occasions to help me buy real estate.
@Justin Reyes another consideration is if you can roll the funds to an IRA that is self directed then invest the funds in that manner. Would let you keep from paying current taxes on it with the growth. This isn't going to help you long term if you want to hack or 1031 your way up the ladder, but the right investments might help increase the value and provide some cash returns to grow the value. There are also issues with self dealing, so it really needs to be invested with someone else.