Portland, OR · Member since 2019 · 24 posts · 3 votes
Hello everyone!
I'm a newbie to real estate investing and the quest for early FI. I've been saving to invest in my first property (likely a house hack either multi-family or renting rooms in a single family) in the Portland, OR area. I'm fortunate to have about $35k in a retirement account from working an hourly job at a hospital from a few years ago, and was wondering if it would be a good idea to pull this out to invest in my first property, knowing that it will be taxed heavily at 50%. It would only be about $17k but it can possibly generate more money in the long term with real estate compared to the ~7% that I cannot access until I retire. I've since started a separate 401k and am matching my employer's contributions so that I can build some retirement as a safety net. I'm 34 years old and working as a Physician Assistant now. A little late to discover real estate investing, but I am hooked! Has anyone pulled out their retirement to invest it in real estate? Is this a good or bad idea? Any help is appreciated! :)
It took me 7 years doing this until I finally cashed in my 401k.
I am very against 401Ks because you can only choose from crappy options that have heavy fees.
I cashed out mine a while ago because I plan to live off my cashflow and retire well before the Government allows you to tap into your retirement account.
If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.
What is the largest source of Revenue for the US IRS?
401K, SDIRA, IRAs, even Roth’s when not if they can change the tax laws. Basically qualified retirement money. People are not spending it and you can bet the IRS is going to get it.
You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money... so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle... this is again incorrect money myths that are so prevalent.
By taking you money out early you will incur a 10% penalty but if you understand how you can easily get 20-30%+ returns in real estate a year that 10% penalty is nothing. You can recoup that in 6-18 months.
It's a no brainer... the numbers don't lie. Do the math.
Yes taking money out of your retirement account is a sin for most people.
If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts that you can't touch till you are old.
Investor · Vancouver, WA · Member since 2014 · 359 posts · 143 votes
6y
@Wa ChanIt depends on the return you can get. If you are getting 7% now then you would have to get greater than 14% to make it worth it taking that penalty.
I agree with @Ned Carey that you should look into rolling it over to a self directed IRA as I think then you could borrow the money to put it into real estate. I have not done it but read some articles on it.
Real Estate Agent · Portland, OR · Member since 2013 · 412 posts · 219 votes
6y
I’d 100% leave it alone. There just isn’t a ton of meat on that bone since you’re considering house hacking anyway. Have you looked into low/zero down/payment assistance loans that’ll get you into a property with very little out of pocket? Your payment will be higher because you’re borrowing up to 101% of the purchase price, but it gets you to your goal and let’s you get started.
Also, assuming you like RE investing and want to get another home after your year loan commitment is up, you can likely use the existing 35K investment as a reserve to help qualify for property #2, which you can’t if you cash it out.
You may be able to take a loan out against your 401k or IRA balance in order to purchase a property. I believe a lot of plans, including 401k allow you to take cash out of your account for things like purchasing a house. The catch is that you will have to pay what your take out back, including interest. Below is a link I quickly found on the subject.
It took me 7 years doing this until I finally cashed in my 401k.
I am very against 401Ks because you can only choose from crappy options that have heavy fees.
I cashed out mine a while ago because I plan to live off my cashflow and retire well before the Government allows you to tap into your retirement account.
If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.
What is the largest source of Revenue for the US IRS?
401K, SDIRA, IRAs, even Roth’s when not if they can change the tax laws. Basically qualified retirement money. People are not spending it and you can bet the IRS is going to get it.
You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money... so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle... this is again incorrect money myths that are so prevalent.
By taking you money out early you will incur a 10% penalty but if you understand how you can easily get 20-30%+ returns in real estate a year that 10% penalty is nothing. You can recoup that in 6-18 months.
It's a no brainer... the numbers don't lie. Do the math.
Yes taking money out of your retirement account is a sin for most people.
If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts that you can't touch till you are old.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
6y
I hadn't noticed that you mentioned house hacking. You cannot use your retirement funds for that as I suggested. you can invest in real estate with your IRA, 401K etc. but you cannot personally benefit from investments you make with your retirement funds. IE you cannot buy a personal residence with retirement funds. Unless of course if you take the penalty.
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
6y
I would not do it, for several reasons.
1) Penalties. Already discussed by many other above.
2) Highest and best use of funds. You are a newbie. No offense, we all were once. But you do not yet have the proven ability to do good deals. Mutual funds are easy. Get one that averaged 10% over the past 20 years and send them a check and forget about it and you earn 10% on average, every year. It's "easy peasy" money. By contrast, some people lose a lot of money investing in real estate because in addition to money it takes time, talent, vision, and ability to deal with people. Not everyone has those qualities.
If I were you, I'd look for a venture capital partner(s) to work with on your first several deals. If you can do 5 deals and achieve at least a 30% return on each one, THEN consider possibly using retirement funds to super-charge your already proven strategy. There will still be properties left to buy in a year or two... I promise.
Investor · Vancouver, WA · Member since 2019 · 8 posts · 3 votes
6y
@Wa Chan There is a lot of disagreement above! 50% is a big blow. A well respected Certified Financial Adviser that is under fiduciary duty, would have the knowledge and give you options to work with in finding ways for you to roll-over. You might have to pay a fee, but it beats loosing 50%.
To add, Portland, OR is a very competitive market for flipping homes and renovations. With Portlands average sales price, $35K wouldn't be enough as a down payment in most cases. I agree with @Erik W.. if you are looking to start your investments now, working with partners would be your best bet.
Warsaw, IN · Member since 2017 · 229 posts · 270 votes
6y
@Wa Chan need a little more info-if the IRA is a Roth you can take out your contributions with no penalty-since those are after tax dollars, it's no penalty, no fee, no tax consequences.
I took out Roth IRA contributions to buy a triplex and don't regret it. I've also loaned against my 401k for the down payment on different properties. Yes, you have to pay it back, to yourself. In my view, it's no different than paying back an investor.
For your first deal, It's worth considering. That being said, I wouldn't cash out EVERYTHING-just Roth IRA contributions or the 401k loan.
Mathematically, the tax is exactly the same, whether you pay tax on the seed or the harvest.
Variables:
Tax brackets now vs. at retirement
Tax rates now vs. at retirement
Early withdrawal penalty
Brackets: It is unlikely your retirement tax bracket will be lower, unless you plan to retire poor. Keep in mind you won't be "poor" in the eyes of the IRS, as you will be making a high income because you are forced to withdraw your entire balance within a narrow time window. Also, you don't know what the tax brackets will be at retirement. You can look back at historical brackets and see that they have varied wildly.
Rates: Not too hard to predict that tax rates will likely increase. See the documentary The Tax Train is Coming. I'd rather pay 50% tax now than face the possibility of ?? to ???% tax later. Lookup "The Willie Sutton Rule". I would be concerned about the security of a large IRA in the future.
Penalty: 10% is a small price to pay for regaining full control of your own money. And you might be able to find an exception to the penalty.
Now, if you want to keep your money in a qualified retirement account, consider a self-directed IRA. Also look closely at a transferring your funds to a solo-401k (sometimes called QRP or eQRP). There are some significant advantages of the 401k option, like the ability to borrow money from the account, $55,000/yr contribution limit, avoid the UBIT tax on leveraged gains, and less red tape than a SD-IRA.
Also you might think about switching from a qualified plan to IBC (infinite banking), which is what I personally chose to do. Compared with qualified retirement plans, IBC offers more security, better protection from creditors, more privacy, no limits to contributions, and easier/faster/more flexible access to funds than any of the qualified retirement plans. It also comes with a death benefit on the side. The gains are 100% tax-free. Current yields are 3.5-4% (after tax), which I believe is better than the after-tax S&P 500 average. And that is with historically low interest rates, which lowers the yield.
That's my two cents.
For more reading, check out Andy Tanner's book 401Kaos and Nelson Nash's book Becoming Your Own Banker or lookup videos on YouTube by Patrick Donohoe or Todd Langford.
Hey Wa, you're never too late to start in real estate!
Rental Property Investor · Bay City, MI · Member since 2017 · 11 posts · 3 votes
6y
@Wa Chan I pulled my 401k two years ago to buy two buildings totaling 15 units as I was transitioning to another employer. It’s been great and I haven’t looked back. Btw I’m still contributing to my 401k with the new employer up to the company match. I put in 4% to get a company contribution of 8%. I figure it’s free money and when I have a chance to step away, I can use that money to buy more real estate cash flow. I’m 37 years old.
Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
6y
@Wa Chan
My wife and I were just having this conversation the other day. She has a 401k from her last employer, that’s only making about 4%. She estimated what it would be worth when she’s 65, (almost 30 years from now), I could make the end figure in about 5 years if she cashed it out and let me buy some properties with it. If it was my 401k, it would be houses in a heartbeat.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
6y
At your point in The Journey along with the amount you have and your location, I would likely NOT withdraw it for your own home. I would consider rolling it over to a SDRIA and look at opportunities to lend or partner with others to make it grow.
With that said, I personally AM thinking about doing what you are thinking of, but I am in a MUCH different place than you in age, dollars in my retirement accounts and tax position.... but I wanted to mention it for others that are in a similar place as me.
I have about 300K in my accounts and am 10 years from retirement. In the ROTH side of things, which are AFTER tax contributions, I have about 75K in 'basis', meaning contributions. Of this I am planning on taking 50K out which after 5 years can be withdrawn with NO tax or penalty. I also have a SOLO401K set up that I can contribute at least 25K per year into if I chose to 'put those funds back into a ROTH vehicle'.
My reasoning for this is that IN the ROTH retirement account if I buy property I typically need to put 40% down. That would get me a 125K property which is very hard to find in my area. The loan is also about 6.5% and only 20 years. If I take that 50K out I can buy a 200K property which I can find all day long and use a Fannie or Freddie loan at 20% down and 4% ish interest which make a HUGE difference over 10-30 years in overall profit. At least that is what the BiggerPockets
Rental Property Calculator tells me :-) With depreciation figured in the cash flow should be tax free for about the first 12-15 years and I can always 1031 Exchange it to defer or eliminate the capital gains taxes too.
To me, the reason that this second scenario makes a difference is;
1) I can leverage at a 4 to 1 ratio (25% down) and 4% interest and 30 year term instead of a 2.5 to 1 ratio (40% down) and 6.5% interest and a 20 year term.
2) Mine is a seasoned ROTH account that I can take contributions out of with NO penalty or taxes.
3) I have the option to 'put money back in a ROTH' with my SOLO401K at a rate of 25K per year or more so I can return the money I earn to 'tax free status' if I want to.
Just food for though for those in similar situations.
Real Estate Agent · Santa Barbara, CA · Member since 2016 · 518 posts · 283 votes
6y
@Wa Chan do not use a self directed ira to buy real estate if you decide to get a loan, you will end up having to pay ubit taxes and penalties on the percentage of profits that came from the loan which can be up to a 39% tax rate. If you want to invest in real estate with your ira look into investing into equity REIT's as that will avoid the ubit tax