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Updated about 7 years ago,

User Stats

12
Posts
3
Votes
Austin Green
  • Chandler, AZ
3
Votes |
12
Posts

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

Austin Green
  • Chandler, AZ
Posted

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.

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