I'm considering cashing out a modest 401k and combining that with cash to purchase a 4-plex. I have seen lots of discussions about the pros and cons of cashing out. Some people suggest solo 401k or self directed, or just keeping it in the index funds it is in to stay diversified. I want to run through a hypothetical example to see if my thinking is correct on this. This example is if the company matches 50% of contributions. Example: Contributions: $30,000 Match (50%): $15,000 Total: $45,000 Amount Left (Penalty (10%) Taxes (30%)): $28,350 If you use that to buy a property with conventional 20% down financing you could buy a property worth ~ $138,750 with $3,000 in closing costs. If you received a 20% cash on cash return you earn $5,670/year. The 401k would need to return 12.6% to earn that... Lets say you have a 20 year note on the property, that's a paid off property worth $138,750 (with no appreciation, which is not likely) plus 20 years of cash flow ($5,670 x 20 = $113,400) Now lets look at the 401k, if no additional money was added and it returned 5% for 20 years, it will be worth ~$120,000. If it returned 8%, which we would all love, it would still only be worth ~$210,000. I'm completely for contributing to a 401k if your company matches. So lets look at the flip side if that $30,000 contributed was taken as income (30% taxes, but no penalty) we would be left with $21,000. That's $7,350 less than if you take the match and cash out and pay the penalty and taxes later. Plus, it is automated and hopefully earning a better return than sitting in a savings account. What I don't like is the lack of control and the highly regulated environment. So, what I'm asking here is for someone to show me what I am missing because it seems lost people see cashing out a 401k as a big no-no. Thanks in advance.

Cashing out 401k, Is it as bad as people say?

Rental Property Investor · Chesterfield, VA · Member since 2015 · 28 posts · 9 votes

9y

I'm not a financial professional but just a few thoughts:

1. You need to see if you are even able to cash out the 401k. Many places will not allow "in service" distributions, meaning you have to leave that job before you can access the cash.

2. The money you take out will be taxed at your marginal rate. Perhaps that is the 30% you are referring to, but just be aware it may be higher than that, especially if the distribution bumps you up to the next tax bracket.

3. Any employer match represents a risk-free 100% return on your money. You can't beat that anywhere.

4. The 401k could earn 8-12% yearly, tax free, depending on how it is invested.

5. Why not suspend your future contributions, save up the down-payment and get the best of both worlds?

I will leave it to others to dig further into the mathematics of it all, but those are some initial things to consider.

3 Reply

Austin Green

OP

Chandler, AZ · Member since 2014 · 12 posts · 3 votes

9y

@Steven Bishop Thanks Steven. Yeah, guess I should have given a little background. I may be changing jobs in the next few months, so that is why I am considering what I should do with what I have in my 401k. I do need to see what tax bracket the distribution would put me in, I just assumed 30% would be close enough for discussion. I agree completely on the match, that's why I put in up to their limit. While I agree on the 8-12% on any given year, mine has returned ~13.5% in the last year, but over the last 5 years it is around 6%. I just don't see hitting over 5-6% long term. There is always rolling it over into my IRA or converting to a Roth, I just wanted to get some feedback on if it is worth just cashing out and investing in multifamily with it.

0 Reply

Derrick Dill

Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes

9y

You should consider a 401k LOAN, instead of withdrawal if you need the cash.

1 Reply

Brian EastmanPro Member

Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes

9y

@Austin,

Take a look at a self-directed IRA or Solo 401(K) plan.

With such a plan you would have access to the full $45K to invest. While a mortgage with an IRA/401k must be non-recourse and will therefore look more like 30-40% down, you still have the ability to leverage and get a higher cash-on-cash return for your IRA dollars. I bet you can do way better than the 6% number you would estimate from a market-based retirement plan portfolio, and you can do it inside of a tax-sheltered vehicle.

The numbers will not look exactly like your example, but take that $45K in current retirement money and turn it into something close to the $250K number in your 20 year example. Then add in appreciation and investing the cash flow inside the IRA and that gets to an even bigger number. That sounds pretty good.

The above is super simple high level. Just food for thought and an encouragement to do some more research on the topic.

1 Reply

Carlos Tavares

Real Estate Professional · Pawtucket, RI · Member since 2016 · 133 posts · 79 votes

9y

most companies that matches 401k 50% they only do it up to the first 3-7% and you have a yearly cap as to how much you can contribute total , I believe it's $18k yearly and $23k yearly if your over 50 years old

0 Reply

Bernard ReiszPro Member

CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes

9y

@Carlos Tavares the $18,000 cap is on employee salary - deferral contributions. Theroretically, employer profit-sharing contribution can be up to $54,000. However, the employer allowable contribution is reduced by any amount contributed by the employee.

[email protected]

0 Reply

Antonio DeFlorio

Mio, MI · Member since 2017 · 28 posts · 15 votes

9y

May not pertain exactly to your situation, but typically a 401K from a previous employer requires an all or nothing approach. If you cash out, you take it all and the tax implications. You can typically convert it to an IRA. An IRA allows you to take disbursements as needed, not all or nothing. The 10% early withdrawal penalty is paid at years end when you file. I know of some IRAs that allow you to choose how much, if any, state and fed taxes you want withheld from the disbursement. Also, you have a 60 day period, once every 12 months, to withdraw from your IRA and then roll it over into another IRA tax and penalty free. This would allow you to borrow from yourself for 60 days, tax/penalty free once every six months if you needed to fund a short term project.

For the record, I am not an accountant. This if from my own due diligence and verified with who holds my accounts. YMMV.

0 Reply

Josh Walker

Investor · Norman, OK · Member since 2017 · 75 posts · 53 votes

9y

I've considered the same thing. To me it depends on your situation. I'm working to replace the cash flow from my current job, but don't need access to the cash flow for a few years. Because of this I went with a self directed IRA and will make some real estate investments within the SDIRA. When I replace my cash flow I'll stop working and cash it out. At that time I'll be in a much lower tax bracket, which is another reason I went with the SDIRA. But there's no way I'm leaving it in there until I'm 60 (20 more years). I'll pay the penalty when the time comes to access the cash flow. I used to think there was no reason to cash out a 401k or IRA early. But if it can result in you 'retiring' early, there's a lot of value in that which can only be determined by the person retiring.

1 Reply

Steven Bishop

Rental Property Investor · Chesterfield, VA · Member since 2015 · 28 posts · 9 votes

9y

@Austin Green gotcha! It certainly could be worth it depending on the exact return of the multi family. As some others have mentioned, perhaps using a self-direct IRA for the real estate deal may also give you a good option that avoids the taxes and penalties. That would probably be better than cashing out, in my opinion. There's also the issue of asset protection to consider--the funds inside your 401k are protected.

0 Reply

Mike ReynoldsPro Member

construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes

9y

@Austin Green I am not an IRA pro but I am pretty good at math. If you have 45k in a 401k and will have 28k after tax (at most but probably less) why not put into a solo 401k and "borrow" half of it for a down payment. That will give you 22.5 for a down and 22.5 left in your account. Worse case scenario is if you cant pay it back in 5 years you will only have to pay tax on the 22.5k intead of the 45k. You may be in the same boat in five years but YOU will still have 5 years use of the money and not Uncle Sam where you will never see it again anyway.

1 Reply

Ben A

Investor · San Diego, CA · Member since 2011 · 52 posts · 11 votes

9y

Solo 401k has been suggested so many times, here and in several threads as a way to have personal access to retirement funds. But I have to wonder just how many folks here that have jobs (like the OP) with W2 as their main source of income, are *actually* doing it. If there are, doesn't that make you red hot to IRS eyes when you are already participant to your jobs 401k plan, and at the same time has a "self-employed" 401k on the side? Especially when the only thing you do that soloK is to borrow money!

0 Reply

Dmitriy Fomichenko

Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes

9y

@Ben A It wouldn't be a red flag because you can have a Solo 401k and a 401k with your employer, even an IRA or Roth IRA too. The loan option is also legally allowed so it's not that you are doing anything wrong by borrowing from the Solo 401k (or from the 401k at your job if possible), as long as you follow the rules and repayment process. There are a couple of things to consider though:

- You need to be self-employed or have an active business in order to qualify for the Solo 401k. For example, many people thought that just because they have an LLC that holds rental properties, they can have a Solo 401k for that LLC. However, rental properties can be seen as passive investments and the rental income can not be used to contribute to a Solo 401k. I discuss this in this post: https://www.biggerpockets.com/blogs/2810/45144-the-biggest-misconception-about-the-solo-401k-plan-qualification

- If you are currently with an employer, most likely you wouldn't be able to roll over your 401k into the Solo 401k/IRA plan until you leave the job. So if the goal is to utilize those funds, it may not work.

1 Reply

Kevin C.

Investor · McKinney, TX · Member since 2016 · 50 posts · 26 votes

9y

I love the idea of using retirement accounts for real estate. Keep contributing to the 401k while you have the match to take advantage of free money but pull out what's in there via 401k loan or early withdrawal. Because you're correct, returns on a good real estate deal can vastly outperform the stock market in the long run. Even better if you happen to have a Roth 401k or Roth IRA that you cash out early you would only pay penalties and taxes on the earnings, not your contributions so the IRS would take a much smaller chunk of those withdrawals.

0 Reply

Lisa Monnig

Investor · Malvern, PA · Member since 2016 · 31 posts · 12 votes

9y

I've worked in HR for many years and cashing out your 401k is just never recommended - ever! Unless your home is being foreclosed upon and even then I would recommend you try and find another avenue. You could take a loan agains your current 401k but that max is likely $50k so not sure how much that would help you. And when you leave your company, if the loan is not paid back you must pay the whole thing back within 30 days or it counts as a distribution. When you leave your job, and cash out you will be taxed on the money and pay a 10% early withdrawal penalty - yikes! I didn't read the entire thread here, so if this has been mentioned and I'm piling on then I apologize.

When I left my job, I rolled all of my 401ks into an IRA at Vanguard (you can use any institution of course). With an IRA, you can take money out and as long as you put it ALL back in within 60 days it is considered a non-taxable event. We did this for a flip. So, you have to leave your job, roll your money over to an IRA, take the distribution, buy the property, re-fi it, and then get all of the money back into the IRA within 60 calendar days. If you can do that then maybe this is an option. Good luck!

2 Reply

Christopher Phillips

Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes

9y

Austin Green Don't do it. People that say it's okay usually don't explain to you the opportunity loss of the compound effect of saving in the stock market. When you take an early withdrawal you are hit with 10% federal tax penalty plus being taxed at your income rate. Fine. On paper, that's how people look at it and will tell you you can go out and double or triple your money in real estate. But that's coming from people with a cash in their hand mentality. But those same people don't usually explain that the stock market's long term average growth of 9% compounded over 30-40 years tax free until you retire is what you're ultimately going to lose.

1 Reply

Christian Ivanov

Investor · Arlington Heights, IL · Member since 2017 · 19 posts · 6 votes

9y

First of all, you will receive a check for 50% of the amount. Then you would have to wait to do your taxes so you can get the rest. Happened to a relative of mine with a low tax rate. I would move the 401k to a self directed IRA and use all of it as a down payment. There are a couple of episodes on BP discussing that option.

0 Reply

Dale Carlson

Rental Property Investor · Port Washington, WI · Member since 2016 · 46 posts · 63 votes

9y

i was in the same situation as you last year. I left my job, moved my money into a self directed 401k. Then i loaned myself the funds to do my first deal. No tax, no penalty on that money. Talk to Justin at Discount solo 401k.

0 Reply

Jeff Wallace

Rental Property Investor · The Woodlands, TX · Member since 2014 · 345 posts · 288 votes

9y

@Austin Green

It looks like I am going to be in the minority here ... and I can already hear the screams and groans --

I left my career about 3 years ago --- In the previous 4-5 years I had developed sufficient passive income from rental property to pay my bills -- so I decided to leave a 16year career and give up health insurance and retirement benefits, etc. All of my family and coworkers said I was stupid to give up a good job with amazing benefits -- At first I was nervous that they were right -- NOW - I wouldn't go back for the world - My Time is free to use as I choose and I love it --- Im no longer waiting until the magic day in the distant future to spend my Time doing what I want...

So, how does all of that pertain to the topic of the discussion -- I have $ in a 401k that we are contemplating our next move -- I know all of the reasons why it would be a mistake to pull it out - I know that if I do cash out, the amount of money I lose will likely make me sick to my stomach for a few weeks ..... Until I buy that firs property.

I can roll to a solo 401k or an IRA and buy several houses wait 15 more years to take distributions on the investments - The value of the account would likely double during that time --- or I can cash out now... and generate rental income to use NOW --- The time value of the investment is an important consideration but the value of MY TIME trumps all -- OUR TIME is our most valuable asset - So, I want to take advantage of the assets I have NOW - I will take what is left after the BIG tax HIT and buy 2-3 properties and start collecting income today - Acquiring at todays prices and in most cases well below current retail. Buying at a discount will offset a good portion of the tax and penalty I pay when I cash out and I get to immediately start using the income to fund future investments - Based on the very basic calculations I have run, in the end, it will be a wash and come out about even. the only difference being that I'm not waiting to start cashing rent checks.

Ultimately, you win with either choice you make, because you are doing SOMETHING - you are investing and furthering your financial position.

Good Luck and Happy Investing

jeff

2 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

There's always an option B or C. If your 401 is the only place left to come up with DP capital, I would review my other income and savings and debt. We don't just wake up where we are. It takes time and choices made along the way.

Do you have other consumer debts @Austin Green? Credit cards, car loans, student loans, etc? It all comes in to play. I would start by exchanging car payments for a functional beater, brown bagging my lunch and brewing my own coffee. Sacrifice some to show yourself and SO you are serious about this. Maybe you have, but it hasn't been mentioned.

Lots of ways to save capital without destroying retirement plans and such in the process. Wherever you go, there you are. More DP capital does not change what got us to the point of needing it in the first place. Good luck!

1 Reply

Austin Green

OP

Chandler, AZ · Member since 2014 · 12 posts · 3 votes

9y

Wow, thank you guys for all the responses! I like the idea of a solo 401k, but I don't think I would be eligible, thanks @Dmitriy Fomichenko for that article. @Jeff Wallace, that's how I feel about this. The problem is that I can't touch for over 30 years, so I would rather pay the taxes on the money now and have access to it instead of complying with the SDIRA rules on real estate, and paying even more taxes on that money in 30 years. This is why rolling into a Roth does sound appealing, being fairly young, but if I'm already paying the taxes why not pay an additional 10% fee and be able to use it NOW. @Steve Vaughan no I do not have any consumer debts besides my current mortgage. I have some cash but not enough to buy a property over ~$50-60k, and I am not interested in single family. With this job change I will have to move and I may use the equity in my current home to invest in something, I just like the idea of cashing out the 401k because to me it feels like a mechanism to keep you trapped.

1 Reply

Mike ReynoldsPro Member

construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes

9y

Originally posted by @Jeff Wallace:

@Austin Green

It looks like I am going to be in the minority here ... and I can already hear the screams and groans --

I left my career about 3 years ago --- In the previous 4-5 years I had developed sufficient passive income from rental property to pay my bills -- so I decided to leave a 16year career and give up health insurance and retirement benefits, etc. All of my family and coworkers said I was stupid to give up a good job with amazing benefits -- At first I was nervous that they were right -- NOW - I wouldn't go back for the world - My Time is free to use as I choose and I love it --- Im no longer waiting until the magic day in the distant future to spend my Time doing what I want...

So, how does all of that pertain to the topic of the discussion -- I have $ in a 401k that we are contemplating our next move -- I know all of the reasons why it would be a mistake to pull it out - I know that if I do cash out, the amount of money I lose will likely make me sick to my stomach for a few weeks ..... Until I buy that firs property.

I can roll to a solo 401k or an IRA and buy several houses wait 15 more years to take distributions on the investments - The value of the account would likely double during that time --- or I can cash out now... and generate rental income to use NOW --- The time value of the investment is an important consideration but the value of MY TIME trumps all -- OUR TIME is our most valuable asset - So, I want to take advantage of the assets I have NOW - I will take what is left after the BIG tax HIT and buy 2-3 properties and start collecting income today - Acquiring at todays prices and in most cases well below current retail. Buying at a discount will offset a good portion of the tax and penalty I pay when I cash out and I get to immediately start using the income to fund future investments - Based on the very basic calculations I have run, in the end, it will be a wash and come out about even. the only difference being that I'm not waiting to start cashing rent checks.

Ultimately, you win with either choice you make, because you are doing SOMETHING - you are investing and furthering your financial position.

Good Luck and Happy Investing

jeff

Actually if you roll into a solo K and use the loan feature as a down payment you can use that loan money for anything you want. Including income property that you make money on from day one. Money in your account not back into your solo k.

0 Reply

Michael Swan

Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes

9y

First of all, if you want to cash in 401k or IRA or the like, make sure that the RE you are buying is cash flowing smartly, you capture some equity and has some appreciation potential. That is hard to find in this particular market in many markets that have appreciated dramatically. Soooooo, if you have found a market that allows you to put tax deferred cash flow into your pocket every month, then go for it!!

You may be saying who are you. I had about $300,000 in IRA's that I cashed in one property at a time for down payments. If my down payment was $35,000.00, I paid the stupid tax (penalty) for even investing in that instrument to start with and the taxes and took out $15,000 more to pay the stupid tax and regular taxes and then started pocketing $400, $500, or $600 a month in 2011 in San Diego, Ca.

Then, of course I had 10 cash flowing very low priced San Diego single family Condos. Then, appreciation happened and I was off to the races. In 2015, I started trading in those $35,000 down payment on those condos for 87 front doors through the power of the 1031 exchange. That is 6 apartment complexes in Ohio. Now I have over 5 million in RE and 2.5 million in equity, since my first little condo purchased in 2011.

I now have $120,000 tax deferred cash flow in my pocket every year and as a teacher I make $60,000 a year at a Catholic School and as an adjunct Professor at a community College here in San Diego working 60 hours a week and my wife makes $20,000 as a special Ed aide in the classroom in the public schools in San Diego.

Soooooo, combined family w2 earnings $80,000 and about $55,000 take home. My RE cash tax deferred cash flow in my pocket has clearly surpassed my w2 earning in 6 years of investing in RE and my personal residence has $200,000 equity and my partner has $500,000 equity in her personal residence too.

America!!! Where else can you do this?

With a 401k. I tell people to only contribute what the company matches and then start a RE money market savings account and save up that extra you were contributing into that 401k beyond the company match. Of course, you need a 6 month emergency fund first. Also, I tell people to get rid of their expensive cars, use Netflix etc.. Get rid of cable and cut wants but not needs and live like no one else now, so you can live like no one else later. If car payments are higher than $300.00 a month total for your family, what a waste of money. Dave Ramsey has that much right. That is kindergarten stuff Dave Ramsey teaches.

Make sure you follow these 3 rules if you want to touch your 401k or IRA

1. It can't lose money.

2. It must cash flow and hopefully handsomely.

3. Unlike the 401K, if done right you can amass incredible financial freedom and take that cash flow in your pocket every month, instead of some imaginary date in the future. Who knows what tax rates you will pay 20 years from know on that 401k or IRA money.

If a lowly paid teacher can do this. Anyone can!!!

Swanny

1 Reply

Greg Dwyer

Investor · Houston, TX · Member since 2016 · 12 posts · 5 votes

9y

My partner took six figures out of his 401k. I thought it was ill-advised, but he persisted. I'm risk averse and later on took out a 50k loan from my 401k. Tapping into our 401k's turned out to be a great move, as now neither one of us has to work a "real" job.

1 Reply

Stephen Flynt

Alpharetta, GA · Member since 2015 · 44 posts · 23 votes

9y

So, did anyone find any actual errors or bad assumptions in the OP's math? I did not.

I see some advice to him not to do it (mostly sort of along the lines of "you're just not supposed to do that sort of thing"), some suggestions that he get a solo 401 (but he's not self employed, he's simply changing W2 jobs hence he has the opportunity to cash out), and some mentions of a self-directed IRA (but he wants to benefit from investing in real estate now, not when he reaches official retirement age which for him is decades away).

@Austin Green, if you've really double checked your math, your assumptions, and have the discipline to follow through on what you're saying, it doesn't seem like a terrible idea at all. :)

1 Reply

Brian Lockhart

Kirkland, WA · Member since 2017 · 1 post · 0 votes

8y

Found this thread (and this site) after searching for research on "pros and cons of liquidating a 401k". All the standard advice to "don't do that, ever ever ever" seems to be making the assumption that the person thinking about doing this hasn't already considered the (fairly well documented and understood) negatives.

But if one has a better opportunity to put that money to use, that has a strong probability of outperforming the 401k even including the penalties? You'd be silly to NOT consider it as a valid option.

Of course there's risk in doing this. But if it pays off and offers a solidly higher return? Might be easily worth that risk.

Since the original post is now over 6 months old, I'm curious to hear what the original poster ended up doing, and how it's worked out so far? @Austin Green what'd you end up doing?

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Cashing out 401k, Is it as bad as people say?

Cashing out 401k, Is it as bad as people say?

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