Using 401k as down payments on multi-family apartment building

[Swati V Patel]

I will be purchasing my first commercial real estate muti-family apartment building. I need to know how much percentage of my 401k would be best as down payments and how much I need to reserve for upcoming expenses to break evendors when needed.

[Dmitriy Fomichenko]

Swati,

First you need to understand that your 401k is not you. While funds in your 401k technically belong to you - you can't benefit from those funds until retirement age. You have two options:

1) Take early distribution from your 401k. If you do that it will be considered taxable event, plus you will have to pay penalties for taking early distribution. The money that are left after paying taxes and penalties (depending on your tax bracket you may end up paying as much as 40-50% of the amount you pull out) now becomes your personal funds and you are free to use them as you wish, including purchasing commercial real estate. 

2) You can rollover your 401k into self-directed IRA (or Solo 401k if you are self-employed). You can only do that if your 401k is with the past employer (current employer most likely will not allow you to move the funds until you are no longer employed or reach retirement age). Then you can use the funds to purchase commercial real estate inside of your IRA. The income from the property will belong to the IRA (you can't touch any of that personally) and all expenses must be paid from the IRA.

Hope this helps.