Dear BP Community, I am actively looking to purchase both units of a duplex, live in one unit and lease one unit (house hack). I found a property that I’m considering making an offer on, and I’m analyzing different ways to pay for the down payment and closing costs. The property is listed at $180k and I’ll be applying for an FHA loan (@ 3.5% down + closing costs = $10k). I have the money in my bank savings account now to make the down payment, or I could use my traditional 401k to fund the purchase. I’m not allowed to take out a loan on my 401k per my plan’s rules, but I can take a hardship withdrawal to cover closing costs and a down payment. Once I take this hardship withdrawal, it is my understanding I cannot ever take another one for any reason (is this true?). The penalty for a hardship withdrawal is 10%. I also have to pay taxes on the funds, although I’ll defer the payment of all these taxes until tax season next year. I can use the money in my bank savings to help me purchase my next investment property in December (I won’t live there), which I anticipate will require a 20% down payment. Also, I won’t be eligible to use a hardship withdrawal to fund my December purchase. My questions are: (1) Have you ever taken a hardship withdrawal from your 401k to fund a down payment and closing costs? (2) Do you foresee any problems using the 401k hardship withdrawal to purchase both units of a duplex? (3) Is there anything you think is significant that I haven’t considered on this deal? (4) Will the use of my 401k funds inhibit me from holding the entire property in an LLC? One thing I didn’t mention above- I won’t be eligible to contribute to my 401k plan for 6 months after my hardship withdrawal, but I’ve stopped contributing to it anyhow after reading a half dozen Rich Dad Advisor Series books. Thanks in advance

@Stephen D. Many plans do not allow you to take out loans, which the OP mentioned, as the cost to add that feature is not worth it to smaller businesses. @Edward Stephens I can tell you from my experience in dealing with clients with various financial positions that a 401(k) early withdrawal is generally not a good idea. It's simply too costly, and if you are a first time investor, you need to focus on building your wealth, not cutting it. I typically ask someone in this situation what their income vs. spending looks like and whether or not they adhere to a budget. It's generally better to tighten the reigns on the spending and delay your real estate investing goals while you build up various savings and reserves. The problem is that your 401(k) withdrawal is going to be very expensive. You are going to pay your marginal tax on the money, the 10% penalty, and you will have foregone earnings. Easily enough, the withdrawal could cost you over 40%. That's insane. I'd recommend trying to find another source of money to utilize or figuring out how to earn and save more. Don't touch the 401(k). That should be an absolute last resort option if life knocks you down and generally should not be used to purchase a rental.

Well I own 2M worth of rental real estate and contribute to a 401k. I feel bad for someone that makes irrational moves based on a book. Even with some success and the ability to quit my job right now I am not. I also put money into my 401k to get the company match and not a penny more. That is free money my company will pay me. It is actually part of your compensation. I dont need a 401k, i put money into it for the match. That is a 100% gain. Invest in bonds then. I said that once. I dont know if the market will crash, i think its doubtful. My money will be out of my 401k and in a self directed account most likely. At no point will I take the 10% penalty. Again, invest in BONDS in your 401k. If your company doesn't offer a match this conversation doesn't even matter. I would reccomend real estate over a 401k with no match any day of the week. It is concerning that you need $6,500 to close on this deal and you want to use your 401k and take a tax hit to do it. I would rather use a credit card (which I use all the time for down-payments).

If an amateur Real Estate Investor doesn't have enough cash to purchase a property, and instead chooses to tap into their 401k for the down payment, what are they going to do when the big-ticket repairs unexpectedly appear, I.e. new roof, new heat system, going a few months with vacancies while the mortgage, taxes and utilities still need to be paid? IMHO the 401k should not be touched.

Did I say Tony Robbins has no business providing financial education or did I say you shouldn't take his financial advice (aka investment advice). He is quite a successful guy and I would take business advice from him in a heart beat, but I wouldn't take his investment advice as that's not his bread and butter. This is further supported by the fact that he interviewed successful financial analysts and economics professionals to develop his thoughts. He delivers true facts nonetheless, but don't think that's a product of his personal financial expertise. When I made the comment (#3) about the tax liability, what I meant was that if you take this distribution and sink those funds into a property, how will you pay the tax liability created by the 401(k) distribution? At tax time, the IRS will be coming for the taxes on that distribution. If you no longer have funds because everything is in your property, what are you going to do? My clients who have taken such a distribution generally don't have adequate reserves and plan on saving the cashflow from the property until you build up those reserves. Their property may be "projected cashflow positive", but what happens if a big capital expenditure pops up? Read one of my BP articles about the triplex I bought. It was an amazing deal, projected ~25% IRR. And I had to unexpectedly replace the roof in the first month I owned it because my insurance dropped my from coverage. I had projected to replace the roof in 4 years. So much for projections. You are making too many assumptions which makes this entire plan that much more risky. The scope of the original question was: should I take an early withdrawal. I said no, and am sticking to my guns. I've provided you with quantitative examples to illustrate why it's a bad idea. You have backed up your thoughts with projections, assumptions, and advice from various business owners (even your deal analysis is choc full of assumptions and estimations). Nothing you have said supports the decision to make an (expensive) early withdrawal. If you were a pro who had a proven track record of buying good deals and making sound real estate decisions, my advice may look different. But for your first property, a 401(k) withdrawal is too expensive and too risky to undertake.

Two things. The deal (to my surprise) doesn't look horrible. You should also be contributing to your 401k to get your company match. You are making a mistake if you give up free money. The stock market is not going to crash. If you think that then invest in something other than stocks in your 401k (bonds etc.). There is no way that book told you to give up free money. If it did, I would be surprised.

Thanks for the feedback, Brandon. I appreciate it sincerely, and hope you and others will continue this educational conversation with me. I understand that a withdrawal could cost me over 40%. I agree that is insane. But I also recognize that the cost is high because taxes are high. I pay about 40% of my earnings each paycheck to various government administrations and social programs. This pre-tax 401(k) money will either be hit with a 40% loss now, or it will be hit by (what I assume will be) an even bigger loss in the future as taxes to rise to feed, clothe, house, and bomb the rest of the world. I also don't believe it is fair to say I am missing out on market gains. I'm simply betting on the US real estate market instead of the US stock/bond market. I'm also betting on my ability to manage my investment better than some faceless trader on Wall Street.

I agree with @Xavier Morales and @Judy P.. If you can not get 3.5% (10k for a down payment) any other way, you are not ready to invest yet. Keep the 401k money for a real hardship. Keep reading in the forums and get educated, read the success stories and also the horror ones, while you find a way to save the money for a down payment and also have some reserves before you start investing in rental properties.

Should I take a hardship withdrawal from my 401(k) for a down payment?

Amy B.

Investor · Flat Rock, MI · Member since 2015 · 10 posts · 3 votes

11y

Hi Edward,

You may find this recent thread interesting. The question is similar but read the answers there too. I agree with one member with an investment firm "no one retires early "investing" in a 401K." However I have not used mine yet. Much will depend on your goals and responsibilities. Warren Buffet "Time in the market is more important than timing the market. " It is not an easy choice...

Should I take a hardship withdrawal from my 401(k) for a down payment?

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