Using 401K to fund REI

[Mike B.]

Hello BP Members,

I'm new to REI and live in the San Antonio, TX area. Has anyone here on BP withdrawn 401K funds to begin a REI career? I am not talking a Self Directed IRA, as I want cash flow now. Also, can you describe the penalties, taxes, etc.

Thank you all.

[Rick Pozos]

30% for taxes and 10% penalty. Ask me how I know.

[Alan Russell]

The 10% penalty does not apply if your 50 or older though

[Mike B.]

Thank you, Rick and Alan.

[Ian R.]

My understanding is that you can withdraw any contributions you made to the account without any fees or penalties since you've already paid taxes on those as personal income. The penalties and fees kick in when you withdraw any earnings the fund has made based on your contributions. The trick is figuring out where that line is. You'd be best off speaking to your financial planner or whoever manages your fund.

Good luck!

[Tyson Hosey]

I just did a 401k loan, not withdraw. no penalties, 4.5% that gets paid back to the balance of my 401k (not the bank)

there are some other specifications to it, like I could only take 50% of my total balance as a loan, they take it right out of my paycheck as repayments, if I quit or get fired I have to pay back the balance of the loan.

read up on it, but it's a way to avoid the penalties

[Rick Pozos]

YOu could take out a loan against the 401k as mentioned above and get started doing some marketing to do some wholesale deals or partner with someone on some rehabs. That might be a great way to have the best of both worlds.

OR maybe you can only withdraw a part of the money so that you still have retirement money as well as some cash on hand.

[Mark Nolan]

@Mike B.

First, you most likely won't be able to touch that 401k if you are still working for the company that offered the plan. 

Second, distributions form a solo 401k are subject to income taxes and a 10% early distribution penalty if you are under age 59 1/2.  See following for rules on this.

https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules

[Bill Pate]

I have done both a 401k loan and withdrawal. Personally I agree 100% with you that a 401k just locks up your money into limited investment options. In the last year I have withdrawn over 100K from a pension and 401k accounts, paid taxes, and penalty. This was done solely to invest in real estate. For me the pension was very questionable whether I would ever get it, so I took the money and run. I have purchased 4 rentals in the last year with the money and I know it was the right move. Was looking at possibly getting $900 a month when I was 62 or possibly getting nothing depending on if they changed the pension rules again for service time requirements. Well I make over $1200 a month off my rental investments from the money right now today, so this seemed like a no brainer to me. Now I only put enough money into 401k to get the maximum match. Before I was putting over 20% a year in there for two decades. Please keep in mind I already owned three rentals for over a decade before deciding to make this move. It wasn't done willy nilly it was a calculated risk. My accountant flipped when I told him what I did, but I have not a shred of doubt it will pay off in spades over the long run. If you do decide this path is for you don't get stuck on a certain type of deal become a value investor. In other words don't worry about only buying multi-family or only single family etc... I own two single family, three condos, and a duplex. The only investment that doesn't produce at least 15% ROI is one of my single family houses. That's only because I bought the house as my personal house then decided to make it a rental when I got married in 2007 because the market was terrible. I had that as a rental for 5 years and lost money every month before I figured out how to make that property actually turn a profit. Don't make very much on that one, but hey you have to start somewhere. Paid approximately 40% right off the top after taxes and penalties. I may have over paid and will get a refund when I file this year, but I didn't want to be under and get stuck with a huge tax bill. I would still do it again in a minute because where I live(Cleveland, OH) real estate prices are the cheapest in the country just about.

[Jeff Greenberg]

@Ian R. Contributions to your IRA are pre tax dollars unless it is a Roth IRA. You will have to pay taxes, and if you are under 55 1/2 a penalty as well.