SDIRA or Cash Out My 401(k) – Help Me Decide (long post!)

[Account Closed]

Here’s my dilemma. I have ~$150k in an employer 401(k). My job ends at the end of February. After that my and my husband’s plan is to invest in multifamily rental properties, reinvesting all of the profits as we go into buying more property. Our goal is to create sufficient cash flow for retirement. We’d like to retire in 10 years (or less), but at the outside 20 years (I’m 34 now, my husband is 32).

Note: We have other retirement funds – my husband has a 401(k) that will give us comfortable income once he's 59 ½. Plus I'll have a pension from the job that's ending once I'm 55. Plus Social Security (though when I do our retirement calculations I pretend like that's not gonna happen….because you know….it probably won't). So in any event we will have an acceptable retirement at a decent age in any case. Anything we do with my 401(k) is icing. Plus we may still start a Roth IRA for one or both of us regardless of what we do with my 401(k) money.

Another note: We will have ~$25k of our own savings to put toward investing, and we could pull about ~$110k in equity out of our house for investing (though I'd rather not do that since the 401(k) money could be used as described below and the HELOC payment would require drawing cash flow off the rental property…which could be a problem if there ever isn't any or enough).

At any rate, here are the options I’m considering with my 401(k) money and the pros and cons as I see them (there are probably more, these are just off the top of my head):

Plan A – Roll the money into a self-directed traditional IRA.

Pros:

• We get access to the full $150k.
• We can pretty much still operate as planned, since we don’t plan to draw off any of the income until retirement anyway.

Cons:

• Getting loans to the IRA entity would be difficult as there are few lenders that do this. Terms are often less favorable than we could get personally. Including…
• A huge down payment (30-50%) is required. We’d likely have a higher going in price point if we simply cashed out and used the resultant ~$100k on a traditional 20% down loan.
• We can’t start drawing until 59 ½ (25 years from now), so this doesn’t really achieve our early retirement goals.
• Direct investing in rental property through an IRA is fraught with risk. It seems the IRS itself isn't even always sure of what constitutes a prohibited transaction until they decide something is. Even reputable businesses that help with this kind of investing now could end up unintentionally steering you wrong, blowing the whole IRA out, leaving the property in limbo and all sort of other legal issues.
• Management and other fees of the self-directed IRA, the IRA entity, etc.
• Slower access to funds – everything has to get vetted thoroughly before any money can move.
• A traditional IRA is simply tax-deferred – so not paying taxes now on $150k means paying taxes later on (hopefully) a lot more money. This is the part I like the least.

Plan B – Roll the money into a self-directed Roth IRA.

Pros

• We get access to most of the money (less taxes, but no penalties).
• Same as above, we can still operate as planned.
• No taxes on the income once it’s drawn out.

Cons

• Same as the first six above.

Plan C – Take disbursement of the money and pay the associated taxes and penalties.

Pros

• I believe this would be the most flexible option. No complicated business structuring, slow access to money, high fees, etc.
• It would be easier to use tools like seller financing, HELOCs on rental properties, partnering, etc. to snowball assets.
• It would allow us to retire when we want/are able to, without the 59 ½ age restriction.

Cons

• Taxes and penalties, likely leaving only ~$100k of the original $150k.

So, my esteemed BP peeps…what do you think? Which option should I choose and why? Am I missing any pros or cons? Are there other options I should be considering (I know they exist, but didn’t include them as I see these as my primary options….but if you have a good argument for another option I’m open to it!).

In any case, thanks for reading!