Pulling out 401k money for investing

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Pulling out 401k money for investing

Sean Harris
New to Real Estate · Atascadero, CA · Member since 2016 · 90 posts · 13 votes

During this whole Covid19 epidemic my 401k investment firm is offering that they will waive the early 15% penalty to pull out up to 100k with no payback. I know there will be taxes due in doing so but I have never seen this happen before and am wondering if I should capitalize on it so I can use this money to invest more into real estate considering the stock market is not doing well anyways. 

I very briefly talked with my tax guy and he said I will be taxed 35k if I pull out 100k. I'm assuming 20% federal and 15% state? Even if so I would still fall in the same tax bracket that I am in currently, so if I was taxed that much I would hope I would get some money back at the end of the year. I have a call with him in the next few days so I can fully explain the situation. If you guys have any input or advice it would be greatly appreciated. Thanks

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  • Allan Smith
    Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    Can't you borrow from the 401k? That seems to make more sense. No tax event.

    0Reply
  • Sean Harris
    OP
    New to Real Estate · Atascadero, CA · Member since 2016 · 90 posts · 13 votes
    6y

    yes you can borrow money for up to a year interest free only because of covid but it's a way smaller amount. I'm just wondering now since it's being offered for the first time I have seen as a withdraw with no early penalties if it would be worth it now rather than have a monthly payment later. Take the hit now vs paying for it over time. Also on the loan you are required to pay it back in full once you get laid off which is possible in a 5 year period

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  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    6y

    @Sean Harris

    Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution or loan. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.

    Distributions:

    If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

    Loans:

    Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

    Here are the details regarding the loans:

    NEW LOANS:

    The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

    Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

      • Individual who is diagnosed with COVID-19, with a CDC-approved test;
      • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
      • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

    On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:

    • Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
    • Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
    • Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
    • Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
    • First Payment:
      • For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
      • For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

    EXISTING LOANS:

    The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

    Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

      • Individual who is diagnosed with COVID-19, with a CDC-approved test;
      • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
      • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

    If you meet the above conditions:

    • You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
    • You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
    • If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.
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  • Sean Harris
    OP
    New to Real Estate · Atascadero, CA · Member since 2016 · 90 posts · 13 votes
    6y

    Thank you for your reply George with all that information. I did look into it and that was the main reason I put it up on here. We were impacted by covid due to me being out of work for 3 months, so this would help pay off things that we fell back on and also help get us back to the point where we could start looking to invest again. Thank you

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