Cash Out Roth 401k to buy more units

[Brian Babbage]

Wondering what folks think about cashing out a Roth 401k to put that money to work in RE. 

I currently have a fully vested Roth 401k through my employer that has a sizable chunk of cash (definitely 2 down payments in my market). I stopped contributing a few months ago to start funneling more cash toward purchasing properties. I am now thinking about leaving my Job to take another higher paying W2 opportunity. I am considering taking the 10% penalty for early withdrawal from a Roth 401k so that I can unlock that money and put it to work in RE. My reasoning here is two-fold 

1. I am more bullish on RE long term than the Market (and even more bullish on RE vs Market short term). 
2. The consistency of the cash flows coming from rentals could expedite my being able to leave my 9-5 faster, therefore focusing more time on RE, therefore building a portfolio that provides something closer to financial freedom faster. 

For additional context I have an SDIRA already that I invest through, and I know I could potentially roll the 401k into that and possibly avoid the penalty, but I am hoping to have this cash in my personal accounts so that once the money is invested I can be closer to quitting my 9-5 and focusing on RE full time. 

[Anthony Wick]

This question seems to come up every month. I can't believe anybody would advise you to take your 401k, pay taxes, and then pay the 10% tax penalty for early withdrawal. Look, you'll have to pay taxes at withdrawal, whenever that is. That's fine. But willingly taking a 10% penalty?! How much is your 401k making now? How much is real estate making now? You'll have to not only beat the stock market consistently, but you'll have to beat it by 10% to get all your money back. 

I don't fault anybody that lowers their 401k contributions to the level of a company match (never give up free money). I don't fault anybody taking a loan from their 401k and paying themselves back. Neither of those requires taxes to be paid and/or penalties to the IRS. Also, the amount of your withdraw matters, because of the progressive tax rate. Post your real numbers if you're comfortable and let us see in writing how much taxes and 10% penalty will be. When I retire, I'll meet with my CPA and discuss the best withdrawal rate for the money I need/want and the taxes I could pay. If my CPA says to take it all out immediately and pay at the highest tax rate (which is what you'll be doing), then I'll get a new CPA. 

Oh ya, you're also thinking about doing this when the real estate market is at a high point. It's not like you're taking advantage like many people did in 2010 and scooping up properties at their low.