Withdraw from 401K or Roth 401K to pay off Rental Property

Member since 2018 · 5 posts · 1 vote

Hello,

I am 62 and nearing retirement. I have a remaining rental property with a $120 K mortgage. Unfortunately, this property has a variable interest rate that is currently 6.5 %. Reviewing my 401K over the past 5 years, it's averaged 5 %. I have enough money in my 401K to pay off the Rental. Alternatively, I could use money I have saved in my Roth 401 K to pay it off, tax free. However, this would reduce my total retirement savings to about 450,000 K. I have three other rentals that i own, free and clear. I see these four rentals providing us a regular stream of income during retirement. In a situation like this, does it make sense to pay off the final rental, or is this a really bad idea?

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

6.5% interest that you are paying and assuming you are in a 30% tax bracket means your real interest rate that you are paying is closer to 4.5%

5% > 4.5%

I would not pay it off early

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Doug SmithPro Member
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
3y
I'm going to side with the "bad idea" crowd. You can't replace the $ in your retirement account. You can roll it to a self-directed IRA (SDIRA) and buy real estate or privately lend, but you couldn't do that with your personal rental otherwise you would blow your IRA up. 6.5% right now is a great rate...it's lower than what you can get a 30-year fixed owner-occupied home for. I would let it ride a bit as, if you refinanced it, your rate would increase. I'm not sure that would improve your position by taking the tax/penalty hit (not sure of your age) you would incur by withdrawing money from retirement.
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Andy WebbPro Member
Rental Property Investor · Carrollton, TX · Member since 2013 · 750 posts · 538 votes
3y
Are you cash flow positive on the rental at the moment with that rate? What if the rate goes higher? If you are cash flow positive, I would not pay it down. But I am quite a bit younger than you and tend to keep my properties leveraged.
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Account Closed
Pittsburgh, PA · Member since 2023 · 55 posts · 25 votes
3y
Hi, you may want to consider the taxes you would pay getting it out of your 401k before you retire.
After you retire you may be in a different tax bracket and that alone would reduce the taxes you have to pay to take it out of your 401k.

If the other houses you own have no loans could you stack all their combined monthly rental income to pay off the remaining $120k mortgage before you retire?
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Walter Wintermute
OP
Member since 2018 · 5 posts · 1 vote
3y
Andy,
I am more or less breaking even on the rental and am concerned that I would not be cash flow positive if the rate goes higher, since it's a variable rate.
Frinee,
I do have the option of paying it off with Roth 401K funds, which would mean 0 tax implications. The drawback, ofcourse, would be that I wouldn't have much remaining in the Roth 401k.
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Joe Tomko
Specialist · Easton, PA · Member since 2018 · 136 posts · 48 votes
3y
@Walter Wintermute while this is by no means advice, I would think that if you have an interest bearing debt and an interest earning account with the debt interest higher than the earning interest, you would likely be better off paying off the debt. Generally.
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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Given your near retirement, and even if you were far away doing an interest rate arbitrage is just stupid. Go for peace of mind.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
3y
@Walter Wintermute
Of course, consult a professional.
Definitely do NOT use your retirement money to pay off the rental. That just converts tax free funds into a taxable rental that you will have to pay to get your own money back to live on. Very silly in my opinion.
In this market, there are MANY good income producing choices that you could invest your Roth funds. Well, if you rolled it over to a Roth IRA where you manage it it might be better.
But, if rates rise a little more, just pull from your retirement funds to cover. Think about it.. If rates rise another 0.5%, on 120k thats only $600. If the funds in your roth were in a money market doing 5%, it would have made $6k. You'd pull 10% of THAT to cover your expenses, and your account would keep growing..
Look at your opportunity cost / alternative investments...
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
6.5% interest that you are paying and assuming you are in a 30% tax bracket means your real interest rate that you are paying is closer to 4.5%

5% > 4.5%

I would not pay it off early
[email protected]917-280-8544
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Walter Wintermute
OP
Member since 2018 · 5 posts · 1 vote
3y
Thanks for the advice!
Will try and pay down the remaining mortgage with money coming in from the other rentals and not touch the retirement.
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Bryan Sheneman
Member since 2024 · 1 post · 0 votes
2y
To some it seems like a no brainer if the interest is higher on the loan than the 401(k) interest but consider this…the loan interest can be written off. Probably considerable enough to offset any perceived gain in paying off the loan. Short term looks good to pay it off, but a look at the long term tells me…leave it in 401(k)!
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