Thoughts on pulling out retirement to invest in Real Estate?

Question

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! :)

-Wa

Lane Kawaoka · Answer

@Wa Chan

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.

Ned Carey · Answer

@Wa Chan I absolutely would not take the money out with that kind of penalty.

You may be able however to move that retirement money into a self directed account. A self directed IRA for example can invest in real estate.

Blake Ingram · Answer

@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 Whiting. if you are looking to start your investments now, working with partners would be your best bet.

Mathew Wray · Answer

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.

Best of luck and let us know what help you need!

Mathew

Kevin Grove · Answer

@Wa Chan

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.

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!

Account Closed · Answer

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.https://www.myubiquity.com/401k/loan/

Erik W. · Answer

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.

Nilo Ignacio · Answer

@Wa Chan

I did the same thing 2003

Removed all my money and invested on myself.

I bought a van and Tools

And boom, I was self employed..

Only diff is I didn’t know anything about real estate.

But I don’t regret it

Do your homework

Everyone is diff and have diff plans, but I would do it again In a heartbeat!!

Good luck

Wa Chan · Answer

Thanks for the input everyone, much appreciated! Will be looking into what you all mentioned.

Thoughts on pulling out retirement to invest in Real Estate?

Most Popular Reply