Should I Withdraw My 401K To Fund My First Deal?

Question

Hey
everyone! I'm hoping for some advice as I look start my real estate journey. A
bit of background - I'm 28 years old, and have been contributing to my 401K for
the last 5 years. Thanks to all the great information on BP, I'm realizing I'd
rather use that money to jumpstart my first deal. I currently
have $45,000 invested in my 401K, and I contribute $600 (pre-tax) monthly.

Knowing
I'll incur a 10% early withdrawal penalty, and will need to pay income tax on
that money - should I withdraw the $45,000 to put toward my first deal? As I see it, my two options are:

1. Leave
the money in my 401K, and cease all future contributions. Save for 1-2 years
until I have enough to put toward my first deal.2. Withdraw
the money and get started now. Getting a 1-2 year head start will
accelerate my plans, and house hacking will still allow me save over that
period.

Knowing
that $45,000 in a 401K will steadily grow if left untouched, is it better to
withdraw or save at this stage?

Mark K. · Answer

You could look at taking a 401K loan.

I used one to successfully complete the BRRRR strategy.

Joe Homs · Answer

@Joe Giovatto I totally agree with @Peter Mckernan and do reach out to @Dmitriy Fomichenko for some guidance.  There is no better way to grow your real estate money tax deferred than a retirement account.  You will be happy when you are ready for retiement.

Good Investing...

Peter Mckernan · Answer

@Joe Giovatto I agree with the rest of the posts, do not withdrawal from the 401K, other options out there and it may take a little longer than you would like, however, the 10% and taxes are not worth the investment. You could move it over into a Solo 401K or checkbook IRA and invest in some deals in your retirement that way. Just some options for you to jump into, ask @Dmitriy Fomichenko if you are eligible.

I would hustle and save for your first cash flowing deal outside of the retirement, and even partnering is a great option too to get that capital for the first deal and you do all the leg work. JV it or fully partner up with a person to do those deals.

Darius Ogloza · Answer

Do not withdraw!  No brainer, really.  In future, fund 401(k) to get match if any provided and save rest in a taxed account to be used for future real estate deals.

Solomon Alaka · Answer

It might be best if you roll over to a BDRA or SDRA which allows you to transact directly through the account without any personal risk, this will safeguard your investment and you as well...

Basit Siddiqi · Answer

@Joe GiovattoIf you work for an employer that allows for 401k, loans, you might be able to tap into 50% of the loan balance which appears to be around $22,500.Most employer's will not allow you to withdraw the 401k until you leave your employer.With that said, you may want to consider withdrawing the funds if the deal you have makes sense.Yes...You will likely be subject to a 10% penalty but if you buy a deal for 5% below FMV(which isin't hard), you basically made up for 1/2 the penalty.You will also get into real estate faster which will increase your education.I took a loan from my 401k and ultimately decided to take it all as a distribution to fund my real estate empire.Discuss with a CPA all the tax implications of a retirement account distribution.

Chris Levarek · Answer

@Joe Giovatto I used the Cares Act to avoid the penalty. this also enabled me to avoid paying taxes for 3 years if I decide to pay back or offset taxes due with other methods. That being said now, your best bet to avoid penalty and taxes would be the 401k loan. This loan is typically amortized over 5 years, so expect high monthly payments but it can be good for flips, brrs, or short term turnarounds.

Additionally, at some point, you can move said funds into a SDIRA if or when you leave your company and then can use these funds for real estate investments much easier. If you are getting a match and planning for long term, it can be good to leave it in the 401k.

Personally, the gains and goals I achieve by not contributing to my 401k outweigh the match or "tax-free" benefits. Each person is in a different situation.

So the question regarding your question becomes, do you feel that you can do better in real estate gains/benefits to offset any withdrawal of a 401k? So would you make up the 10% penalty fairly quickly? Would you beat the returns on your 401k?

That should give you an answer.

Chris Herrera · Answer

@Joe Giovatto  I get where the majority is coming from on not getting the penalty and tax and at the same time I believe in having more control in my money and investments.

I have taken a loan on my 401k and would do that first and if you find a good deal that you can really commit too and need all the money then I would just do it.

It’s better to get started than not but my main concern would be if you need to pull that money then it doesn’t seem like you’re liquid enough for any unseen maintenance and that’s where you can get in real trouble.

Jeffrey Donis · Answer

I agree you should reach out to @Dmitriy Fomichenko. While taking action is important, and time is valuable, I'd avoid being taxed on that money if you can.

Happy Investing!

Joe Giovatto · Answer

Thanks for the advice, everyone!@Bradley Dosch - really appreciate the detailed reply, makes total sense. The game plan is to look for my first deal in a much more affordable market than Orange County lol I don't have any other liquid funds available at this time, but I'm confident I'll be able to save over the next year. I'll definitely check out the down payment assistance programs you referenced as well. Thanks again!

Should I Withdraw My 401K To Fund My First Deal?

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