Is it worth pulling all money out of 401k to jump in buy/hold?

Question

With all this talk about a potential recession coming soon. I'm eager to know if anyone else has thought about pulling out all of their money out of their retirement accounts and going full throttle on real estate investments?.

I'm just starting off looking to purchase my first house hack this year and then focusing on Buy and hold SFH. I believe I'll be able to buy 2-3 sfh a year but with the money I can pull out of my retirement account I can probably do 3-5 homes.

Any advice?

Jay Hinrichs · Answer

if you choose to roll over to 401k to self directed  investing in debt  NOTES is better than buying the fixed asset.

since you cant use the depreciation.  and financing can be tough.

Notes are a prime investment vehicle for these funds.. I have only invested in Notes since I set my sepp IRA up in 1983 ish.

George Blower · Answer

@Franklyn Gutierrez

Here are considerations regarding taking a 401k loan vs. purchasing real estate via the 401k:

Purchasing Real Estate via a Solo 401k:

1. First, you must meet the eligiblity requirements including that (i) you are self-employed; and (ii) you do not have any full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise working for you. Given this understanding, you would be eligible to establish a self-directed Solo 401k which allows for investing in real estate.

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Regarding taking a 401k loan and then purchasing the property in your own name:

• You would have to confirm that your 401k plan allows for a 401k participant loan (and that you have not had an outstanding loan in the last 12 months).
• If yes, you can borrow up to 50% of the balance not to exceed $50,000.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan. Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).
• If you are self-employed with no full-time employees & you can rollover the funds, you could set up a Solo 401k, rollover the funds and take a 401k loan from the Solo 401k.
• In this case, you would purchase the property with the proceeds of the loan. This means that the property is owned in your own name and you are not subject to the rules and restrictions that apply when purchasing property via a 401k.

Edward Liu · Answer

Unless you are already retired, this is a very bad idea. By pulling money out of 401k, you incur huge tax bill. Every dollar you pull out is counted as your income (on top of your regular income). Depends on how much you pull out, you could owe IRS 40% of $$ you pull out. Without earning a cent from the real estate investment, your return is already negative 40%.

You might consider borrowing against 401k, but interest rate is high vs normal loans.

William W. Humphrey · Answer

Certainly if your 401(k) plan is eligible for rollover, one solution would be to have the tax advantaged money stay tax advantaged by rolling it over into a self-directed IRA (or other plan) and buy the properties within the account.  If you are still employed with the company that sponsored the 401(k) plan, it is worth asking the plan administrator if the plan allows for an "in-service" distribution, meaning that you can rollover some portion of your plan without tax or penalty.

William W. Humphrey · Answer

If your self-directed IRA buys real estate using debt, you would use depreciation on your 990-T to calculate possible UBIT (Unrelated Business Income Tax).  This is generally not the case for 401(k)s, as they don't typically incur UBIT as a result of debt financed income.

Also note that because of the way UBIT is calculated, there is a strategy to take depreciation (as part of your UBIT calculation) over any number of years, pay off the debt service, wait 13 months before selling the IRA owned property, and never have to pay tax on that depreciation taken!

Is it worth pulling all money out of 401k to jump in buy/hold?

Most Popular Reply