SD IRA or 401K vs taking the tax hit on early withdrawl

[Cory Adams]

Hi folks - first post. I'm in Austin and new to BP.

I have owned a few SFH rentals and would like to expand my investments and am open to other types of properties.

If you had 170k in a 401K what types of deals might you consider and how might you structure the usage of that money?

I see the choices as:

1) Take several early withdrawals while paying the tax + penalty over a period of years and use those funds along with other cash to buy several SFH as the down payments accumulate. Advantage here is that I've paid the tax + penalty and the forward income can be used before retirement. I'm confident that when I retire the retirement age will be set to 99, the money will not buy a slap on the back and income taxes will be 99.9999% so while this might be a bit of sarcasm, I don't have a lot of confidence in the forward purchasing power of equities locked up in USD by the time I retire (I'm 45).

2) Setup an SD IRA or SD 401K while being aware of UBIT for the IRA case and leverage usage.

3) Leave the money in the capable hands of our prudent and conservative managers earning avg 4 to 6% / year (they really are great people). I'm concerned with bail-in announcements in the US and EU and being Corzined in another big down turn but then again I imagine all asset classes including RE will not get away from the blast damage in such another 2008 crash scenario.

Some things that appeal are the possibilities of using a large down to leverage into a multi-family with say more than 3 to 4 units. I do realize that there needs to be enough money left over in the SD IRA or 401k vehicle to cover any and all expenses on a monthly ongoing basis.

Thanks for your time.

[Will Barnard]

Originally posted by @Robert Leonard:

There is also a short time period (5yrs) that you have to pay the money back into your solo-k.

This is not entirely true. If the borrowed funds are used for a mortgage, then you can have the loan at a 15 year term, so simply record a deed of trust against a property and it becomes a mortgage loan.

Now, on to the question, while this is all just opinion, I would not suggest paying the taxes and 10% penalty. First off, for every one hundred thousand you have, you not only lose on the taxes owed, but just the penalty alone costs you $10k and to get that back, you need to have the $90k left (leaving out the taxes part) earn you more than 11% on that money just to break even. I am fighting to do my best to get as much into a tax advantaged account and here you are wanting to go the other way. Not sure why anyone would consider that other than an extreme emergency.

I am also of the opinion that holding RE inside a tax advantaged account like an IRS or 401k is not the best use of the funds. Buying notes and making loans is much better, again, that is an opinion also held by several others on this board. We have had many discussions on this topic here so please do search for them for details.